Why the Fiscal Cliff Is So Important

Focus: MARKETS

Andrew Busch Image Andrew Busch Editor-in-Chief and Publisher, The Busch Update

The fiscal cliff has the potential to drag down the US economy at the precise time the rest of the world is relying on it to keep global growth going, says Andrew Busch.

We’re at the World MoneyShow in Chicago and I’m talking with Andrew Busch about the fiscal cliff. Now we hear a lot about the fiscal cliff. But I’m not quite sure: A) people really know what it is; and B) what the implications are for it.

Well, the fiscal cliff is a series of tax changes that are coming to the US economy. It depends on how you calculate it, but the way that we look at it, it’s about $1 trillion that will be moved from people to the government if it all hits at the same time.

This runs from the Bush tax cuts rolling off to fixing AMT—alternative minimum tax—to all sorts of things that kind of add up to about $1 trillion. And if you look at it, it’s about 4% of GDP...so if you’re looking at GDP, if GDP was running at 2.5%, you’d lose about 1% off of that so you’re at 1.5%.

That’s significant because Christine Lagarde, the head of the IMF, said this is the biggest risk for 2013. In other words, if the US economy slows down by 4% to 5%, then the rest of the world essentially catches the cold. It’s really disconcerting for them as far as growth prospects going forward. So that’s why there’s a lot of focus on it, and I think that’s why we’ll get some action by Congress before the end of the year.

Yeah, we’re the strongest engine in this weak economy at this point in the global economy.

Yeah, we really are.