October 30, 2012 Leave a comment
Jim O’Neill, Goldman Sach’s Chairman of Asset Management, just spent a week in Washington D.C.
He assumed that the horrific nature of the looming fiscal cliff crisis would light some fires under politicians and get them moving towards a resolution.
Boy was he wrong. As he puts it in his latest article:
“After the discussions I had with people in DC. although this was not a major feature of any discussions, I did leave more concerned than I had been this time a week ago about the ‘fiscal cliff’. I’d been assuming for weeks that in order to avoid the 4% of GDP tightening that no deal would imply, it would be easy to find a deal…
“One has to hope that the economy will be sufficiently robust, despite the fiscal issues, for the Fed to shift its position. A combination of large fiscal tightening and pressure on the Fed to reduce its monetary friendliness doesn’t seem like a great combination for equity markets. Of course, the lack of fiscal tightening and no agreement for future fiscal tightening doesn’t seem like a brilliant recipe either. I hope it’s just my jet lag but I find myself pondering the following: usually countries will not deal with tough fiscal challenges unless markets force them.”
Unfortunately, if and when the market forces action, it may be far worse than the 4% hit to GDP that is expected.