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US Economy Faces Another Cliff

US Economy Faces Another Cliffi
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January 18, 2013 12:52 AM
The U.S. may have avoided the fiscal cliff, but analysts say the last minute Congressional agreement at the start of the year to raise taxes on wealthy Americans and avoid massive spending cuts was only a temporary fix. Now, even as President Barack Obama begins his second term, another financial crisis is looming - one with potentially severe implications for the world's largest economy. Mil Arcega has more.

US Economy Faces Another Cliff

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The U.S. may have avoided the fiscal cliff, but analysts say the last minute Congressional agreement at the start of the year to raise taxes on wealthy Americans and avoid massive spending cuts was only a temporary fix.  Now, even as President Barack Obama begins his second term, another financial crisis is looming - one with potentially severe implications for the world's largest economy.

The U.S. government has already reached the congressionaly imposed borrowing limit of $16.4 trillion and could run out of money by mid-February.

New York trader Benedict Willis says the coming debate over raising the debt ceiling could be even more acrimonious.

"Now we'll go from the talk of fiscal cliff, I'm sure we'll start talking about the St. Valentine's Day massacre because that's really the deadline we'll be looking at as far as the deficit reduction and the debt ceiling talks are concerned," Willis said.
 
Republican House Speaker John Boehner is demanding major spending cuts in exchange for any agreement to raise the debt limit.

But President Barack Obama calls that - irresponsible.

"If congressional Republicans refuse to pay America's bills on time, Social Security checks and veteran's benefits will be delayed.  We might not be able to pay our troops or honor our contracts with small business owners," Obama said.
 
The government would be unable to pay the interest on its debts -- creating massive turmoil in world markets.

But analysts say the damage is already done.

"If you're a business and you are about to hire 100 new employees but are not sure what is going to happen with the debt ceiling, you're going to wait until the situation has passed. So as Congress is bickering, it's really kind of like pulling back the reins on the horse and not letting the horse run," said financial adviser Frank Reilly.

The last budget battle in 2011 resulted in the first credit downgrade of U.S. debt.

Although investors continued to buy U.S. bonds, Marc Goldwein at the Committee for a Responsible Federal Budget says another downgrade could damage U.S. credibility.   
 
"A downgrade from 'Triple A' to 'Double A' by itself doesn't usually have that much of an effect.  It's basically saying instead of your bonds being really good, it's very good.  That's basically how they qualify it. The danger is - what about the next downgrade, and the next one?," Goldwein said.

House Speaker John Boehner admits the consequences of not increasing the debt limit are real, but he says - so too are the consequences of allowing the country's spending to go unchecked.

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