Christine Lagarde, head of the International Monetary Fund, IMF, is warning Barack Obama and the United States not to make false compromises concerning the Fiscal Cliff. Appearing on CNN′s ″State of the Union″ on Sunday, Lagarde cautions that a truly balanced approach must include both revenue increases and spending cuts. That just raising taxes without any genuine spending cuts and kicking the can down the road will not be helpful. She said. ″There is still that degree of uncertainty that fuels doubt, that prevents investors, entrepreneurs, households from making decisions, because they don′t know what tomorrow will be.″ On Sunday, Obama met with Speaker of the House, John Boehner, to discuss the Fiscal Cliff. Both sides agreed not to reveal the outcome of those talks.
So far, all of the focus has been on raising tax rates on the top 2% of income earners without any real spending cuts. Obama wants to return to a top tax rate of 39.6% from the current 35%, a move which is expected to net roughly $1.1 Trillion dollars over the next ten years. The Fiscal Cliff takes place on January 1, 2013 when the Bush Tax Cuts expire, generally increasing the tax rates across the board for all income levels by about 5%. In addition to this, numerous deductions and other taxes breaks will also expire, along with the sequestration agreement from 2011 to slash $1 Trillion in spending from the Defense and federal discretionary budgets.
During the past two months, tax revenues have actually increased some $37 Billion per month, but, as is typical in the New Normal of the Age of Obama, federal spending has also increased by more than $89 Billion per month. Each day, Uncle Sam must borrow another $4.8 Billion dollars to pay its bills, which leads to another looming problem, the debt ceiling, which limits how much the government can borrow. That limit will be reached by February if spending continues at the present rate.
The IMF, which tries to coordinate the activities of the world′s central banks and national economies, has its hands full already overseeing the economic chaos in the European Union. Several nations in the EuroZone have already gone through an initial phase of severe austerity measures as countries like Greece and Spain flounder with large debts and high unemployment. About the only reason the U.S. bond market is still enjoying itself is due to the terrible state Europe is in, along with our own Federal Reserve Bank and its ′quantitative easing′ program of lending money to large banks and institutions to purchase equities.
The main problem in the United States, however, is the weakness in our economy. The rate of growth has been anemic at best. Current projections by the IMF is for the U.S. economy to grow only 2.1% in 2013. Most post-recession recoveries enjoy growth rates 3 to 4 times that rate. None of the proposals on the table by Obama, or even the Republicans, offer any plan that would double the growth rate of the economy. Add in the negative impacts of both ObamaCare and the Dodd-Frank laws and it is easy to see why the IMF is predicting 2013 to be yet another bad year for America.
Will anyone listen to Christine Lagarde of the International Monetray Fund? Will Barack Obama take her advice and put some genuine spending cuts on the table along with the revenue increases proposed by House Republicans? Or is John Boehner right after he said last week that the Fiscal Cliff talks have stalled? Is the United States headed for a major economic downturn in 2013? With just barely 3 weeks to go, there appears to be little hope that any sort of real plan will be hashed out and approved in time.