Economic storm clouds are brewing in the distance. Europe seems to be unable to get on the same page. The only thing shared by the Europeans is the currency. Besides that, they are several different countries with different ideas about how to deal with the crisis. The Germans want to see some financial discipline before they sign off on any more bail outs while the rest of the Euro Zone wants to continue to live like spoiled children. When the financial equivalents to going to bed early and not eating ice cream for breakfast are proposed, there are riots in the streets. By the way, America stayed up til 4 a. m. last night and had Rocky Road for breakfast; our day is coming.
Our immediate problem, the so called financial cliff, is a combination of several things. The possibility of the Bush tax cuts expiring on Jan 1 mean that most peoples tax rates will increase by 5%. All else being equal, that is a 5 % cut to consumer spending which makes up 70% of GDP. Simple math tells you that will create a 3.5% drop in GDP. That’s a recession. Item number 2 on our list is the automatic sequester of 1.2 Trillion in Federal spending cuts. This is going to take away a lot of jobs in the public sector as well as private sector jobs in companies that contract to the government. Number 3 is the debt ceiling. Yes we already spent the 2 Trillion credit increase we got about this time last year. That means we have to do it all over again. It cost us our AAA rating last time. If we take another rating cut, bond prices will go up, they will any way, our interest rates go up and we need a larger portion of our revenue to pay the interest. Lets say 30yr Treasuries go to 6% and because of our low credit rating we are no longer to roll over short term debt. If you look to the top left hand side of the blog you will see the debt clock. We are near 16 Trillion. 6% interest on that is 960 Billion dollars. Lets write that out with the zeros for effect. $960,000,000,000.00 in interest alone! That is about half of our total federal revenue. Things will get bad at that point.
We will save the employment time bomb of Obama care coming in 2014 for another time. sufficient to say for now, all small business will lay off workers to either get below the 65 worker cut off point so they don’t have to contribute to the heath care plan or they will lay off workers to absorb the cost of contributing. This eclipses everything else in the previous paragraph. I voted for Ron Paul in the primaries.I am not a Romney fan but given a choice between a bullet in the foot and one in the head, I’ll take the foot every time. the bullet in the foot may eventually kill you but you have a lot better chance of being able to do something about it.
Nouriel Roubini, Professor of economics and economist for the IMF, World Bank, and US Treasury gave a great interview on the perfect economic storm we may be Facing. ( 16 minutes)
Starting Friday, we will start a 7 part series on how you can get prepared.
