A two percent decline in gross domestic product, official unemployment numbers reaching double digits and the start of a second recession. These are likely scenarios the United States would face if the fiscal cliff is not avoided and a deal between the Republicans and Democrats in Washington is not made.
The Fitch ratings agency released a report titled “Fiscal Cliff Would Stress U.S. Transportation Infrastructure” Monday that concluded that it did not expect Congress to allow the tax cuts to expire and automatic future spending cuts to transpire in January given the “far-reaching effects” of such measures.
In October, the official unemployment rate stood at 7.9 percent, but if the fiscal cliff takes place then that number could soar to above 10 percent, while the GDP would fall to a flat 0.4 percent growth.
“Given the far-reaching effects of the Fiscal Cliff, it is not expected that Congress will allow these tax and spending cuts to take effect. But were it to occur, the effect on airports, roads, tunnels and bridges could be significant and could pressure ratings,” said Michel McDermott, Managing Director and head of the U.S. Transportation team, in a press release. “Traffic on roads, freight indices, and airport traffic all point to an economy on a somewhat surer footing.”
According to the study, the largest sector to take a hit would be transportation. The ratings agency wrote that the number of airline passengers could drop by five percent. 20 years worth air traffic data suggests that airlines see increases and declines to demand with the nation’s economy. Furthermore, airports are intense borrowers, which could mean effects to the bond investors.
The fiscal cliff would also affect certain airports. It is projected that airports near leisure spots would see the biggest impact in a second recession.
Forecasts from the ratings agency suggests that import volumes could plunge because of the decline in both consumer confidence and spending. However, the numbers would not be as horrid as the 2008 recession.
It concluded that Fitch and other ratings agencies will cut the U.S. debt rating if a plausible long-term deficit-reduction plan is not put forward.
Meanwhile, the Treasury Department has warned that the national debt limit will hit $16.4 trillion by the end of the year and wants the fiscal cliff negotiations to also include increasing the debt limit. Wall Street and corporations are urging Washington to reach a debt limit deal before early 2013 to avoid a credit downgrade akin to the one that took place in summer 2011.
“As a practical matter, it would make sense to wrap it in,” said Ken Bentsen, head of the Washington office at the Securities Industry and Financial Markets Association (SIFMA), in an interview with The Hill. “You could move on to deal with tax reform and fiscal reform and all other things and not have this looming cataclysmic event hanging over you.”
Even Federal Reserve Chairman Ben Bernanke is concerned over the national debt and budget deficits.
“It’s not something that is 10 years away. It affects the markets currently,” said Bernanke in a speech to the U.S. House Financial Services Committee in October. “It is possible that the bond market will become worried about the sustainability [of deficits over $1 trillion] and we may find ourselves facing higher interest rates even today.”
Economic Collapse News reported Thursday that Peter Schiff, President of Euro Pacific Capital, said the Federal Reserve will cause the economy to collapse and not the fiscal cliff. He told CNBC this week that the U.S. needs a much bigger fiscal cliff, which consists of larger budget cuts rather than cuts to future spending increases.
“If we avoid the cliff, that is very bullish for the gold market because that means that trillion dollar-plus deficits will perpetuate, and these big deficits are what’s undermining the dollar because the Fed has to print money to finance them,” said Schiff. “The more money they create to buy up the bonds that nobody wants, the higher the price of gold is going to go.”
According to the Congressional Budget Office (CBO), the national debt is slated to increase to $20.3 trillion by the end of President Barack Obama’s second term. Also, even though the budget deficit will dip below $1 trillion for the next three years, it will go back above the $1 trillion mark when the president leaves office.