Without a resolution of the vexing fiscal cliff, the U.S.
could face spending cuts and automatic tax hikes amounting to
$600 billion, which would automatically go into effect from
January 1, 2013. This could in turn push up the national
unemployment rate above 9% and shrink the Gross Domestic Product
(GDP) by an estimated 4%. The Administration has about a month
and a half to reach a bi-partisan deal. In the meantime, the
rating agencies are watching every move in Washington, D.C.
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One negative outcome of all this uncertainty is that U.S.
companies, despite rock-bottom interest rates, have hoarded about
$1.7 trillion in cash. Firms are curbing investments as they fret
about the fiscal cliff at home, an economic slow down and change
of guard in China, political turmoil in the Middle East and the
Euro mess. The curtailment of business investment has serious
ramifications for capital formation and productivity.
It's not just industry that is worried about the cliff. Judging
from the performance of the U.S. markets lately, investors may be
spooked by a possible increase in taxes on dividend and capital
The President recently maintained his line that taxes must go up
for the wealthiest 2% of Americans. In doing so, he has indicated
that he will not buy into any deal that maintains the Bush era
tax cuts for the rich. At the same time, President Obama added
that the nation was not prepared for a tax hike on most
Americans. In fact, he called on Republicans in the House to
favor an extension of existing tax rates for families with an
income of $250,000 or less.
Furthermore, the President added that he would be open to later
considering reform of entitlement programs, including Medicare.
For its part, the GOP leadership has indicated that they are open
to tax reform and closure of tax loopholes, but oppose the
imposition of higher taxes on the rich.
Credit rating agencies must contend with so much uncertainty.
Furthermore, the U.S. lacks the kind of strategic roadmap that
rating agencies may be fond of seeing. Standard & Poor's
Rating Services, a part of
The McGraw-Hill Companies, Inc.
) currently retains a AA+ local and foreign currency rating.
) has a negative outlook on the U.S. at present.