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Budget Update: Fiscal Cliff, Death or Salvation?
- While the President’s budget has gone nowhere in Congress, the House has been busy pulling together its own detailed plan under the leadership of House budget committee head Ryan.
- While Republican candidate Romney has called Ryan’s budget “marvelous,” he might want to marvel from afar as the large reductions in spending and closing of cherished tax loopholes may become divisive campaign issues during the election.
- Congress and the White House are unlikely to deal with budget matters and the well-known fiscal cliff until after the election.
- While the fiscal cliff poses a risk to the expansion, there are numerous opportunities for bargaining to reduce the near-term fiscal drag. Still the risk is that the economy could slow abruptly, in a replay of what unfolded in the late 1960s.
- The Fed may be prepared to help out, if the White House and Congress do the right thing and reduce near-term fiscal drag, adopt a long awaited $3 trillion plus “grand compromise” to reduce the deficit and debt, and call for meaningful tax reform for 2013. This would be scenario quite favorable for all dollar-based assets.