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Washington Fiddles While Our Economy Shrivels


From the moment the election ended in early November, the financial media have been dominated by a single story; the fiscal cliff. Countless hours have been spent debating the issue as lawmakers haggle over who and how much to tax, while to a lesser degree discussing how to cut spending. So entrenched are the sides in this tax-and-spend showdown that it seems the negotiators have lost all perspective and that the real goal is political victory.

"The biggest drag on the economy is fiscal policy and the fiscal cliff," says Kevin Cummins, senior U.S. economist at UBS. As it stands now, his firm (and most others on Wall Street) is expecting only 2.3% GDP growth for 2013, and even that projection is vulnerable and based on some fairly positive assumptions and continuation of recent trends in things like housing.

"What will be critical (next year) will be job growth,'' Cummins says in the attached video, adding that the U.S. Economics team at UBS is looking for hiring to accelerate to about 200,000 a month from an average of 140,000 we've had for the past six months. That said, he describes his growth forecast as "probably more back-loaded than front-loaded," predicting a slow start to 2013 followed by gradual improvement as the year progresses.

Clearly Ben Bernanke and the Federal Reserve get it, and have unequivocally and unilaterally used every tool in their toolbox to keep interests rates low in an effort to shield our fragile economy, for years to come, from any headwind that might push us back into recession. Every headwind, except the threat of inaction (or counter-productive action) by our government here or catching the flu, so to speak, from an ailing Europe.

"If we can get a deal in the next 11 days or early next year," Cummins says, "better times are ahead for the U.S. economy." At the same time, he says the biggest risk to his growth target next year is Europe and the threat of potential spillover in financial markets from their recession and debt crisis.

"We really haven't had that impact just yet, but it is a big risk," he cautions.

In the meantime, we can only hope if and when a deal does get done in Washington that it's a good one, and not the hidden headwind that could turn sluggish into something worse when it comes to the broader economy.