What's The Deal With The Fiscal Cliff?

     Hey everyone! I just wanted to give a quick update regarding the Federal Reserve before I jump into my actual post. Last week, I discussed Ben Bernanke and his Federal Reserve speech. Following his speech, it was mentioned that the Federal Reserve Board will be meeting up this week to decide whether or not to take any action in order to stimulate the economy. Well, on Thursday, the Fed decided that they will buy $40 billion in mortgage-backed bonds each month for as many months needed in order to try and stimulate the economy. This move, in my opinion, is a great one and I applaud the Federal Reserve Board for coming to this decision. Stocks have also responded very well to the news, with the Dow Jones and S&P 500 ending at their highest points since 2007.

     This week's topic that I want to discuss involves the "fiscal cliff" that are slated to take place in January of next year if Congress is unable to come to a decision on how to address the situation. This whole situation started last year when Congress failed to reach a bipartisan debt-reduction deal. Because of that, about $7 trillion worth of tax increases and spending cuts will go into effect on January 1st. There are quite a few pros and cons (mostly cons) that this will have on the U.S. economy. The major pro this will have is that deficits will be reduced by nearly $1 trillion over the next 10 years.

     There are numerous cons to this fiscal cliff however. First off, there will be billions of dollars in cuts from a variety of activities. For example, approximately $55 billion in defense spending and an additional $55 billion in non-defense spending (such as education and air travel safety) will be automatically cut from the federal budget. These cuts could potentially have a huge negative effect on all the programs affected. In addition, income tax rates will rise substantially for citizens once next year rolls around. Another huge con from this situation is that if all this money is taken out of the economy, the risk of falling into another recession greatly increases, which in turn will lead to more job layoffs and a rising unemployment rate (estimated to be at 9% in the second half of 2013).

     If Congress can find a way to come to a solution and avoid this whole situation, the economy in the short term will continue to grow as more jobs will be maintained and created for citizens. However, this will cause the U.S. deficit outlook to worsen over the next few years as money continues to be spent. In a perfect world, I wish both sides could just come together and compromise some of the cuts so it wouldn't be as negative as it will be if nothing is done. It's too bad that politics today can't be that easy since neither side will budge one bit. I guess the most we can do for now is hope that a miracle happens and something gets accomplished from this situation. I honestly don't want our economy to have to deal with another potential recession, especially when things aren't even completely back to normal as of today. As we get closer towards the new year, I'm sure more news regarding this fiscal cliff will come up, and I'll be extremely interested to see what happens.