Looming U.S. Fiscal Cliff

Much is being discussed in various forums regarding the looming U.S. fiscal cliff. Currently, federal annual budget deficits are averaging in excess of one trillion dollars ($1 Trillion) and national gross debt levels are in excess of sixteen trillion dollars ($16 Trillion). This is in addition to a gross domestic product (GDP) which is averaging less than 1.5%.

It is also important to note that interest rates have been maintained at levels near “zero” while, multiple rounds of quantitative easing (QE) or “digital money printing” have been initiated in order to maintain positive cashflow via injection of liquidity into the financial markets and preclude any liquidation events.

Key fundamentals with respect to fiscal policy, monetary policy and banking policy need to be addressed in a highly integrated, tangible, concrete, definitive and comprehensive manner in order to restore and sustain confidence of global investors, bondholders and various stakeholders.

Basic principles of economics and finance clearly demonstrate a direct interrelationship and intricate balance which must be maintained between; 1) Balance Sheet (Assets & Liabilities); 2) Revenues & Spending and; 3) Cashflow (Sources & Uses of Funds). Key goal is to continually maintain Assets greater than Liabilities, Revenues greater than Spending, and Sources greater than Uses of Funds. Moreover, inflation is often caused due to the increase in money supply and deflation is often caused due to the failure of private sector and public sector debt.

In coming months and years, it will be interesting to watch and witness the methodology, approach and path that will be undertaken with respect to maintaining current levels of interest rates, current levels of income tax rates, current value of US$ with respect to gold and Euro. In addition, it will also be important to ascertain how current liabilities, national gross debt levels and various unfunded liabilities will be deleveraged. All of the above needs to be addressed while dealing with state/local/municipal fiscal and debt levels, unemployment, underemployment, stock markets, business capital allocation, as well as other domestic and international political-socio-economic issues.