Fiscal Cliff

Love him or loathe him (no need to answer that), George Bush's actions at the start of the banking crisis were effectively to all but stop taxes in the US. This would be paid for by higher taxes and spending cuts many years later, giving him plenty of time to escape into the night on his horse.

 

That time is now upon us.

 

Unless all political parties agreed otherwise, the tax rises and spending cuts became law on 1 January 2013 in the US. This would see significant and far reaching negative consequences on economies throughout the world (the UK included).

 

However, at the 11th hour, an agreement was reached and a craze of optimism swept through investment markets......falsely. 

 

 

Reality Check #1

No agreement was made on the tax increases and spending cuts. The parties simply agreed to delay a decision and stop Bush's law coming into effect.

 

Reality Check #2

Let's take the following example household:

 

Annual Income:     £  21,700

Annual Expenditure:      £  38,200

New Debt On Credit Card:     £  16,500

Outstanding Balance On Credit Card:     £142,710

Total Budget Cuts So Far:                               £        39

 

Now, replace £ with $ and add 00000000 to the end of the figures......and what do you get? The US economy. Frightening isn't it.

 

Now add to this the UK's reliance on the US economy buying our goods / services, we have a problem.

 

Let's imagine President Obama comes home from work to find sewage problems. The sewage goes all the way up to the ceiling. What should he do?

 

(a) Raise the ceiling.

 

Or

 

(b) Remove the sh*t?

 

It's a tough call but it can't be ignored. This is what US politics will now debate over the next 6 weeks.

 

So the next time you hear the US Fiscal Cliff mentioned and dominate the TV / radio / newspapers, remember......it is a big deal for us. The US economy is effectively our economy.

 

Frightening but reality.