We all know how time flies when December rolls around. The dreaded Christmas carols on loop in the supermarket signals the beginning of the uninhibited annual retail frenzy. Shops get busier, the days get warmer (for most of you), tension mounts and those carols seem to get louder and louder. Deadlines and obligations must be met, holidays planned and our social calendars fill up faster than a spoilt child’s Christmas stocking. You know the drill…
This is also a time when New Year’s resolutions need to be made to ensure success and prosperity for the year(s) ahead. The resolution currently being hammered out between US President Obama and the Republican Congress will have a widespread impact. In true US style, the politicians have left saving the world - or at least America - to very last minute. This is something we have become used to in recent years - remember the 11th hour raising the US debt ceiling? As the New Year’s Eve deadline creeps closer, important decisions that will affect stock markets, bond markets and liquidity around the world need to be made. I’m not quite sure if Mr Obama fancies himself as some sort of Bruce Wayne but he really is leaving it rather late to make a resolution to overcome one of the major roadblocks to a sustained global recovery.
It’s no secret, as we saw during the recent US election campaign, that Democrats and Republicans hold vastly different views about taxation. The Republicans’ view is that the wealthy should receive tax cuts to incentivise them to invest and grow the economy. The Democrats’ believe the wealthy should pay more tax, commensurate with their higher disposable incomes. This has long been debated by Americans with neither argument proving definitive. We do know that something has to be done to arrest America’s ever-growing budget deficit. The soon-to-expire tax breaks put in place during President Bush’s tenure will apply a whole lot more pressure to households at a time when America is a house of cards ready to topple at the first sign of added strain.
Something needs to be done, and something will be done. Following a post-election downturn, markets have stabilised and December’s performance so far has factored in little in the way of any imminent catastrophe. Indeed, the recent rally reflects bullish expectations about forthcoming policy decisions.
In 2012/13 the Democrats are expected to lean further to the right than many would like as the country is pushed towards the edge of the co-called ‘fiscal cliff’. Resolutions need to be made quickly and swift resolutions demand compromise. Obama has been reluctant to sway from the views of his party, particularly in the lead up to the election. But time is running out and compromise is now essential.
In an interview on CBS this week, the President referred to a “lack of balance” in Republican views on taxation. He mentioned further spending cuts and reductions in healthcare, but these alone will not fix the monstrous debt situation facing the world’s largest economy.
View Obama’s comments in his first interview regarding the Fiscal Cliff since re-election:
America will survive, but not without casualties. A second economic downturn to rival what was experienced as a result of the Global Financial Crisis is unlikely. Nevertheless, changes need to be made. America’s rate of spending is not sustainable in the long-term, despite a third round of quantitative easing and improved housing and equities sectors. Just how America will sustain its recovery in the face of harsher taxation and subsequent lower standards of living is yet to be seen.
Markets currently seem comfortable with the progress made in 2012. Stock prices reflect the confidence of investors and home prices reflect the confidence of consumers. But the next few weeks leading up to the ‘cliff’ and a possible flight of capital back to safety will test the markets.