Molding the Fiscal Cliff into a Fiscal Ramp

A stark dichotomy exists with the United States’ fiscal situation today. As we try to hang by the hairs of sustainable recovery, we are running towards what could be an inescapable abyss of debt. Letting go means we might avoid the abyss, but also might lose the  prospects of what might be a quicker recovery. Losing that hope might throw us into a greater downturn and in turn, could push us towards the abyss once more. This is the anomaly of the fiscal cliff.

The problem is not an awfully difficult one to navigate though because the two risks have very different probabilities. All signs point to there still being a while to go until we hit the point where the debt is too much to overcome. For one, the Treasury is still selling bonds at near-record lows. Furthermore, relative to other currencies, there is still strong demand for the USD. I see no reason to throw away this recovery based on the numbers.

That being said, there is certainly a need to cut back on fiscal expenditures at some point, but that does not have to happen overnight or any one given night, like December 31st, 2012. What instead would be much safer for the recovery is to gradually make the cuts (and/or raise taxes) over a longer period of time, effectively molding the fiscal “cliff” into a fiscal ramp. This is the solution I believe DC should be working towards instead of partisan bickering over tax rates for the rich. Of course politics has motives other than what is sensible though and we will likely see this game of chicken continue into December and possibly beyond. And as that happens, the role monetary policy could play in all this will likely be ignored in the equation as usual (on Capitol Hill)…

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