US Fiscal Cliff: Potent Recession trigger, source of market volatility

Last Updated : 30 November 2012 at 14:40 IST

"Are you an investor?"

"Yes, I am..."

"Are you ignoring the fiscal cliff issue?"

Don't say yes! One investor can only ignore the issue at one's own peril.

The continuing market volatility across commodity markets is mainly attributed to three factors:

1. Uncertainty regarding the US Fiscal Cliff issue
2. Uncertainty regarding Europe's economic crisis
3. Uncertainty regarding US' recovery from recession

Last things first!

The US is widely reported to be recovering from recession. Last quarter saw 2.7% growth. But it has to be noted that the growth in times of hardship is entirely different from growth in times of prosperity. The former is indicative of a trend that may falter, but for the time being may suggest of an attempt to stand on its feet, even as the latter is indicative of a definitive growth cycle working itself out. There is a huge difference between both. US may be recovering; hence the word 'uncertainty' regarding US' recovery from recession.

Now when it comes to the second issue pertaining to Europe, one should note that it is not having an easy solution. The woes are complex, to say the least and complicated or intractable to say the most. It is one factor that can still upset the so called apple-cart of recovery; the feeble recovery in US, included.

The first factor can have two outcomes

a. The talks may fail and the issue may get dragged well into January creating so much of panic in the markets.
b. The talks may succeed and the cliff issue may get averted; but still may stand to lose the coveted debt ratings.

Whatever be the outcome, some economists do not rule out the chance of a recession. “The fiscal cliff issue, if it goes off the cliff may not trigger a recession as such, but it can work as a potent trigger.” said Martin Patrick, an economist based out of Kochi, South India.

The fiscal cliff issue has a bigger, broader dimension: it is all about political economy; in a broad sense, it means the issue is as much about politics as it is about economics and the tug of war between Republicans and Democrats in Congress may add to decision lag, implementation lag and production lag--lag in economic output--which should be averted at all costs. For it can create what we have all been seeking to avert: another spell of slow down.

The politicians should be ready to compromise, should think creatively to save the world. They should exhibit speed and be of authority, Martin Patrick observed.

Now, with Democrats retaining the Presidency for a second term, will they bow to Republican pressure: it is highly unlikely. And, will not the Republicans take the inflexibility of Democrats as an excuse not to compromise? Highly likely.

As published in: http://www.commodityonline.com/news/us-fiscal-cliff-potent-recession-trigger-source-of-market-volatility-51591-3-51592.html