Are we all headed for the cliff?

Fiscal Cliff

“ Fiscal cliff ” is the widespread term used to describe the paradox that the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

The U.S will face tax hikes and a series of spending cuts which will have a dramatic effect on the economy. A combination of higher taxes and spending cuts would reduce the deficit by an estimated $560 billion but the policies set to create this saving would cut GDP by 4 percentage points in 2013 which could send the economy into a spiral of negative growth.

Estimates predict that unemployment would rise by 1% with the loss of two million jobs.

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What strikes me as particular unusual is that the market anticipates the Fed to announce a $45 billion monthly Treasury buying scheme that would push the central bank’s balance sheet to almost $4 trillion.

It seems that Peter is being robbed to pay for Paul’s future anticipated mistakes. People will have to endure tax hikes, spending cuts, unemployment and negative growth for the Federal Reserve to turn around and create a loss far bigger than any saving they are trying to create!

Unfortunately, the fiscal cliff isn’t the only problem facing the United States right now. At some point in the first quarter, the country will again hit the “debt ceiling” – the same issue that roiled the markets in the summer of 2011 and prompted the automatic spending cuts that make up a portion of the fiscal cliff. The summer of 2011 for Gold bugs may be a slightly nostalgic season for 2011 when the market saw more than 25% growth in 8 weeks.

“Everyone is expecting the Fed to print more money and keep buying securities,” Michael Smith, the president of T&K Futures & Options in Port St. Lucie, Florida, said in a telephone interview. “The best hedge against a decline in the value of the dollar, in most people’s minds, is gold and silver.”