Author`s name Dmitry Sudakov

USA's nightmare on Christmas eve

The potential "fiscal cliff" in the United States that has recently made numerous economic news headlines is quite a possible event, unlike the recent "end of the world." The United States will be expecting it from February 2013. What is meant by this term, and what may the "fiscal cliff" bring to the world, particularly to Russia?

It is very easy to make people panic. As for Americans, they have developed a practical fondness for it. For example, the day before the alleged end of the world, many US citizens showered NASA with their requirements to explain to them how exactly the apocalypse is going to happen. On December 21st, at least thirty schools in Michigan closed as the authorities were expecting the doomsday to come.

This time, the Americans, as well as the rest of the world, have a real cause for concern. Federal Reserve chairman Ben Bernanke made predictions of problems that could come in February 2013. His gloomy forecast is based on the fact that January 1, 2013 will see the end of George W. Bush's tax breaks. At the same time, the US will enforce austerity measures that were planned in 2011. The Fed chief called this double blow to the US economy a "fiscal cliff." It is impossible to avoid this cliff: both measures are to arrest the rapidly growing national debt and balance out the U.S. budget deficit.

These steps are inevitable to ameliorate the first (at least for now) economy of the world. Bernanke, however, warned that the proposed measures - tax increases and reduction of budget spending - are able to create a lot of problems in the country. Experts outlined some of the problems that the Americans may face in the near future. Budget sequestering will touch upon, above all, social spending on health care and education, as well as defense. The liquidation of tax breaks will lead to the fact that an average American family will have to pay an additional $5,000 to the state, which would be quite sensitive to the budgets of the middle class.

It is assumed that the army of the unemployed will "recruit" one million people at once and will reach 9% compared to the current 8.3%. Instead of the expected growth of 1.5%, the U.S. economy will fall by at least 0.5% - and this is only an official estimate. Pessimistic investment bankers predict a decline of 2 to 5 percent, given the multiplier effect. Most experts agree that the American economy has not seen such problems since the Great Depression.

It is easy to guess: should all these dire predictions come true, the United States that has barely recovered from the recession of 2009 will plunge into the crisis again. Coupled with the ongoing economic euro zone crisis and the expected cooling of the Chinese economy, new problems could lead to the recession, which will make the previous round of the crisis a funny joke. Russia, in particular, may face a sharp drop in prices of hydrocarbons and other minerals. Capital outflow from the country will grow, budget problems will intensify, the economy may significantly collapse.

Everyone, of course, would be happy if America could manage to survive all this well. However, there are only two ways to curb the budget deficit that has reached 8.5% and the public debt that has reached $16 trillion and nearly took the U.S. to default in the summer of 2011. The first one stipulates that citizens have to help their country by paying higher taxes (the wealthier the citizens - the more he/she has to give to the state.) However, the Republican Party vehemently protests against this option, being a long-time guardian of the interests of successful Americans.

The second option is to refuse from the maximum possible amount of social spending, leaving citizens to survive on their own. However, this option goes against both Barack Obama's campaign promises and the political platform of the Democratic Party in general. America did not think much about the "fiscal cliff" during the pre-election campaign. It would seem that Obama's decisive victory could put an end to the debate of how to avoid it, but the final solution is not possible without the approval from the Congress, where the Republicans enjoy the majority. They do not want to hear anything about raising taxes.

Initially, Barack Obama, speaking on behalf of his party, promised to cut budget spending by 1.22 trillion dollars in the next ten years, requiring the consent of the opposition in return for a tax increase for all, whose annual revenue exceeds $250,000. In response, the leader of the Republican majority in the Senate, John Boehner, offered to save 800 billion dollars by eliminating gaps in the law and by leaving alone the taxpayers whose annual income was below one million dollars.

During subsequent negotiations, the parties were successfully moving towards a compromise: to raise taxes for those who annually earn 400-500 thousand dollars. Alas, it did not happen: the Republicans did not support their speaker. They refused to discuss the bill that was made to prevent the "fiscal cliff" bill. The Senate went on vacation; the question was left open. The Senate will gather for its next meeting only on January 3rd, when new economic realities come into force.

Markets reacted immediately to the stubbornness of the Senators. Rating agency Fitch threatened to downgrade the U.S. rating. Standard & Poor's downgraded the rating of the country in August, the U.S. Treasury then explained it was a mistake of analysts. In general, the trouble has already begun.

One should not expect an expected economic collapse on January 1, 2013. This date is crafty enough just like all other calendar dates. In reality, U.S. officials  have a couple of months to turn the fall from the "fiscal cliff" into a slow and careful descent. The U.S. history shows that American pragmatism often allowed them to get out of trouble with minimal losses. The world has changed and will not be as predictable as it was twenty years ago.

Ilya Nikonov


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