The End of The World

Posted at 11/26/2012 10:22 AM

The Mayans must be upset. After working so hard at their calendar, with only three weeks to go, it looks like the world is not coming to an end.

I guess there is still the fiscal cliff in the U.S. and the possible collapse of Greece and the Euro so we could still get there.

The fiscal cliff refers to a number of economic measures that will automatically be triggered if President Obama and the House Republicans do not agree on how to resolve the U.S. fiscal deficits by the end of the year. Specifically, taxes will increase for all Americans, Government spending will be slashed, unemployment benefits will end for many of the 23 million still looking for a job, and payroll taxes will be re-instituted. These will collectively siphon about $600 billion from the economy potentially driving the U.S. back into recession with consequences on the dollar, financial markets and world trade. If this is not enough, the U.S. sovereign debt ceiling comes up for review in February 2013. If not raised, the U.S. Government will run out of cash shortly after and potentially go into default. The prospect has investors worldwide holding their breath.

With all due respect to the Mayans things will not come to this. Despite all the media hype about the intransigence between Republicans and the White House, the fiscal cliff will be averted. The lesson of the Nov. 7 elections is Americans are tired of the partisanship and paralysis in Washington. By the drubbing they were handed, Republicans must by now recognize Just Say No is not a winning ideology. They will therefore come to the table albeit kicking and screaming. A possible outcome is for a temporary compromise of higher taxes for the rich but the income threshold will be increased beyond $250,000, a cap on tax deductions, and some spending and entitlement cuts with a plan to address the long term fiscal issue by end 2013. The debt ceiling will also be raised. It is a half-baked solution where everybody will be equally unhappy but it should buy America another year.

Greece is another matter. The nation is a dead man walking. How much more can be squeezed from a country whose economy has dropped some 30% in the last few years and an unemployment rate past 25%? The rich have reportedly withdrawn over $130 billion of their onshore assets so there is little wealth left to be taxed. What the country needs is a weaker currency and a restructuring of the Government’s bureaucracy and bloated payroll (Greek civil servants allegedly earn up to 40% more than their German counterparts) which is not going to happen unless the country leaves the European Monetary Union and Greeks get real. The only thing holding their exit is the fear of contagion in Spain, Italy, Portugal, Ireland and even France. Once a way to ring fence the Greek problem is found, they are history. In the meantime, European officials will continue to kick the can down the road.