The World Bank suggests that if the United States fiscal cliff is not averted it would reduce U.S. growth by 2.2 percent and global growth by 1 percent. It does not stop there as the World Bank also mentioned that we could see a 5 percent decline in U.S. import volumes, a 6 percent decline in oil prices, a 2 percent drop in metal prices, and a 1 percent drop in food commodity prices.
The stakes are high and the world would be the victim should the Republicans and Democrats not come to a solution regarding our debt. U.S. citizens, regardless of party affiliation, want to see progress. Anything short of that would cost us dearly -- to avoid solving this problem head-on could cause a ripple effect impacting real GDP of high income and developing countries in 2013. Not to mention this would again paint the U.S. as the 400-pound gorilla who can’t climb a tree to find its supper.
While anyone could say the consequences of a full blown fiscal cliff for the U.S. are certain, I would be remiss in not mentioning that the impact on the global economy, on a surface level, is less known. Or at least so it seems until you consider U.S. imports. Once you do, the line in the sand becomes more apparent. Also, with this in mind, the reasoning becomes clear, and one could conclude that commodities will suffer from the fiscal cliff. Likewise, the dollar and U.S. assets, as a whole, would be sold and the U.S. could fall into a recession.
Truth be told, this is a very serious issue that warrants more attention. Don’t get me wrong, the problems in the Euro zone are pronounced, but we should be just as concerned about the problems we have in our own backyard. Why? Because the world is counting on us to do so and, sometimes, doing the right thing through the proverbial mudslinging is the best thing for our children and grandchildren.
Looking forward one could assume that smart money will be more conservative and the markets will be skittish in the months to come until a tangible solution has been agreed upon in Congress. Be that as it may, there is one good reason to participate in today’s market: the resolution. A solution to the U.S. “debt” issue could give the necessary jolt in equities investors have been clamoring for; the U.S. economy desperately needs it.
While all of this seems very simple, we are talking about politics here. In the political world nothing is remotely close to being simple. With that said, your guess is as good as mine as it pertains to a long-term solution for the fiscal cliff. For right now, we all will just have to wait and see what the end game will be.