Bernanke Afterthought: The Looming Fiscal Cliff (Tax & Spending) Poses Great Recovery Risks

FOMC meetings and the press conferences which follow each quarter now can show some important insight into what the real underlying risks and issues are to the economic recovery.  It is often hard to decide which bits matter the most and which bits get lost in the shuffle because the reporters asking Mr. Bernanke questions can have so many different angles and so many different agendas.

There was one takeaway that we are shocked did not get more play and more attention, and it is something that both Congress and the White House need to greatly consider in a time of austerity and when taxes are set to rise for many key earners at the start of 2013.  About 18 minutes into the Bernanke post-FOMC press conference on Wednesday is where we think the focus needs to come down because it contains an outlook and a warning about the looming fiscal cliff in 2013.  It is this key issue that may ultimately decide the election outcomes for the White House and for Congress.

The warning is over if no action is taken at all.  Mr. Bernanke said that it is imperative for Congress to give us a fiscal policy that has to be based upon sound fiscal policy and in a way that will not endanger the short-term recovery of the economy…. At about the 17:50 to 18:00 minute mark of the press conference is where the real jewel and the real warning comes into play.

Bernanke said, “And I am concerned that if all the tax increases and all the spending cuts that are associated with the current law which would take place, absent any Congressional action, that would occur on January 1st that that would be a significant risk to the recovery.  So I am looking and hoping that Congress will take actions that will address both sides of that ‘uh’ both requirements of good fiscal policy.”

The looming fiscal cliff…  Not enough time was spent on this as the conference was more around projections, economic outlook downgrades, deflation versus inflation, what low rates really mean, and other important issues.  What Bernanke did not address is that Congress has not done its job in taking any actions that are good for the population as a whole.  The infighting is too deep and getting to any middle ground seems impossible today.  How long has it been since the U.S. government operated with a real budget now?

The United States has already lost its prized Triple-A rating from the ratings agencies and the risk is of further downgrades.  New and fresh actions from France and The Netherlands indicate that there are risks that austerity measures will not be taken by the stronger nations in the European Union and any domino-effect might allow U.S. politicians to be less hawkish about living with budgetary means.

As we have seen over the last two years or so, politics is a very dirty game and finding the real winners or beneficiaries is often a challenge.  Selling austerity and budget cuts to the public is a hard task.  At the end of the day it is just easier to sell the notion that it is better to have good times at any cost rather than contraction or doldrums just to live within budgetary means.

How this all ultimately plays out really depends upon the elections in November.  After that we will know for sure how the looming fiscal cliff will play out, but polls and predictions are already trying to get a jump to determine who will win the White House and which party will be in clear control of Congress.

This looming fiscal cliff was not given anywhere near the attention it deserved.  Our future depends upon it.

JON C. OGG