Fiscal Cliff A Reality for Many Home Sellers

Deadline Looms For Action to Avoid Tax Hikes and Sequestration
The fiscal cliff so many are concerned about could have a greater impact than has been previously supposed.  The United States may be at risk for a far deeper recession than was previously supposed if lawmakers fail to reach a compromise before the end of the year.
If Congress fails to act in time, the new year will start with higher taxes and spending cuts. That is forecast to extract $600 billion from the economy.  A number of economists hold that every dollar of deficit reduction achieved will subtract an equal amount from the economy.
By this measure, the present course could cause the economy to contract by .5% in 2013.  This is the estimate from the non partisan Congressional Budget Office (CBO).  Such figures have essentially been endorsed by many on Wall Street and the Federal Reserve.  Economists at the International Monetary Fund along with others in academia suggest an even larger impact.  Each dollar in deficit reduction could siphon up to $1.70 from the economy making matters far worse.
Barry Eichengreen, an economics professor at the University of California at Berkeley stated, “You can take that .5% reduction and double it.”
Economists in this camp believe fiscal contraction takes a bigger than expected bite out of economies when interest rates are very low.  This is currently the case in the United States and in much of the developed world.  One explanation for this is that when rates are higher, central banks can easily lower them to provide an off put to austerity, but when rates approach zero, it is harder to ease the pinch.
History Shows Fiscal Discipline Has Poor Payoff
The data history reveals that higher taxes or lower government spending only has a slight impact on household spending.  For the three decades ending in 2009, a dollar in cutbacks only pulled half that much from the economy.  This comes from an IMF report that tracked spending in 28 major economies.
Economies around the world however have reacted differently since the start of the Great Recession.  Every dollar in fiscal cutbacks have led to a draining of anywhere from $.90 to $1.70 from economies.
The IMF suggested that central banks have been having a hard time offsetting the impact produced by tighter budgets.  That could turn out to be the case in the United States as well.  The Fed pushed the overnight rates ion interest close to zero in 2008.  It has recently taken to purchasing government and housing related bonds in an attempt to revive the economy.
Ben Bernanke, Chairman of the Federal Reserve, has acknowledged that he would not be able to fully offset the impact if the economy goes over the fiscal cliff.  With the jobless rate in the U.S. at 7.8% and the recovery shaky. The prospect of a greater than expected hit to the economy should make lawmakers consider some sort of deal on the budget before the end of the year.  There isn’t much room for error.

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