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Saved from fiscal cliff

Publication Date : 04-01-2013

 

The jury is still out.

Despite the US' success in averting the fiscal cliff at the turn of the year, the expedient bipartisan agreement is set to cause new problems that will bring about continued uncertainties for the global economy and markets.

The agreement to patch up the potential US$600 billion hole is far from a real fix. In two months' time, US policymakers will have to face the more thorny challenge of raising the debt ceiling, which is expected to provoke more alarm in the US and global financial markets.

For many, it was no surprise that the United States averted the fiscal cliff, as it was crucial for the US economy that it be resolved.

Disillusioned citizens in the US are all-too familiar with such drama: First, a deadline for a calamity is set; then a fierce debate rages between the two parties, with the dispute seemingly hard to untangle; then the formidable prospects of failure frighten all into action and the immediate problem is solved, in the process sowing the seeds of new problems.

However, behind all the drama is the inescapable fact that the world's largest economy has run out of steam. After the busting of the IT bubble, the US has failed to find a real booster for its growth. And the debt pile-up, thanks to its profligate spending sprees, including costly military manoeuvers overseas, has increasingly constituted a drag on its already poor growth.

With the economy continuing to be weak, policymakers have few choices but play the game of robbing Peter to pay Paul until they gradually iron out the debt gap in the coming years.

During that process, there will be frequent incidents to put stress on the markets. A bigger bipartisan showdown, for example, will be staged in the coming two months and if their differences increase so will the danger of the US economy falling into recession, with the rating agencies likely to kick in to complicate the situation.

An issue in the US can be a global problem. So it is reasonable for the financial markets to be prepared for fallout from changing US policies. The ups and downs in the post-crisis years well testify to the necessity of preparedness for world investors.


 

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