If you thought Thai politics was asinine, the yanks aren’t doing that much better, the ongoing fiscal cliff debate has only proven this. The markets reaction seems to be “wooo at least something got done” but thats akin to hearing a parent say “I take care of my children.” The wall street economists have come out with their thoughts and the tone comes across as “Ok well, there’s still a lot left to be done,” see below and click the link for more.
–On the positive side, the compromise averts a mix of tax increases and spending cuts that would have done more harm than just push the nation into another recession. It would have also seriously undermined the hard-earned healing occurring in the housing sector and in many families’ stretched balance sheets. With that, our economy would have experienced a significant air pocket, and would have faced an even more difficult subsequent recovery. As important as this gain is, it is unfortunately not overwhelming. The hard-negotiated political compromise does little to address the consistent headwinds that undermine growth, hold back corporate investment, and dampen job creation. If the objective were to promote employment, the nation’s most urgent challenge, the compromise prolongs crippling political uncertainty rather than removes it.–Mohamed El-Erian, Pimco
–The full “fiscal cliff” has not been avoided. The deal just enacted implies a significant tightening of fiscal policy this year. Payroll taxes are going up and federal spending is being cut by the amount anticipated in the BCA. These measures will be a drag on growth, starting in the current quarter. Taken at face value, the deal appears to entail somewhat more fiscal drag for 2013 than we had assumed in our forecast. Second, we now face a difficult debate over raising the debt limit. An increase in the debt ceiling will have to be done by around the end of February (at this point, Treasury has not given a specific date; this may come within the next few weeks, but it has been indicated that there is about two months of headroom). The upcoming negotiations are likely to be even more difficult and contentious than the ones just completed. –Lewis Alexander, Nomura Global Economics