Cheer Up! The Cliff Doesn't Look So Grim

As we pointed out yesterday in our Week 52 performance post, there are going to be some real people that are affected n a negative way if there are no resolutions in some key areas such as the extension of unemployment benefits and taxes namely the AMT patch.

As we often like to do, we want to see the contrarian view of this argument regarding how bad the cliff could be.  As with anything in life it's business as usual until something happens to you and then it becomes personal.

Gene Epstein, in his weekly Barron's column provides his insights given the fiscal cliff situation.

• Technically, the cliff consists of a fiscal tightening, the opposite of a fiscal stimulus -- if stimulus from one year to the next is supposed to boost economic growth, then a fiscal tightening should slow it down. Over the long run, deficit reduction should be the goal. But it can be disruptive if the fiscal tightening is too great in a single year.
• Looking back at the years since World War II, nothing remotely compares with the fiscal tightening that occurred in 1946 and '47. Despite warnings at the time from Keynesian economists about an imminent depression, the deficit as a share of nominal GDP fell to 7.2% of nominal GDP in '46 from 21.5% the year before, a tightening of 14.3 percentage points. And to add insult to economic injury, that 7.2% deficit turned into a surplus of 1.7% by '47, after a further tightening of 8.9 percentage points.
• ...the incessant warnings about the fiscal cliff may be one reason personal saving has recently increased, perhaps in preparation for the tax hikes. And despite the collapse in asset values during the great recession, household net worth as a share of income is actually much higher than it was in years prior to 1970, leaving households better prepared.