Kicking the US fiscal ‘Can’ down the road

There is a saying of “Kicking the can down the road”, which means to delay a decision in the hope that the problem or issue will go away or that someone else will make the difficult decision easier to swallow, the later it is made. This saying has also recently been applied to the ‘Fiscal Cliff’ of the American fiscal deficit and the ways that it can be brought under control. A hard path to negotiate if ever there was one.

The US ‘Fiscal Cliff’ is the deficit which would have been caused by simultaneous changes in proposed tax rates combined with government expenditure. This was due to occur on 31 December 2012 until the US politicians (Senate and House of Representatives) finally agreed to extend the US Government’s borrowing limit/ debt ceiling. However, they only extended this by a matter of months and effectively “kicked the can down the road”.

You may have noticed in the media recently that the US government has started a partial shutdown after both Houses of Congress failed to agree a new budget. This has meant that the federal government has to save running costs and to achieve this has partially shut down non-essential departments and their related personnel. This could potentially affect more than 800,000 federal employees who will be on unpaid leave until the budget can be agreed. The knock-on effect to America’s GDP could be significant if the situation is sustained for a long period. The shutdown is significant, but is not the ‘main event’. The debt ceiling is.

Effect on the US Economy and Dollar

The planned budget agreement to resolve borrowing limits was meant to be ratified by both Houses of Congress by 30 September 2013. As you may know, this was not achieved. One consequence of the first shutdown in 17 years has seen an initial weakening of the dollar on 01 October 2013. Some commentators in the media are suggesting that these recent events could derail the world’s largest economy. I believe this is somewhat of an extreme view and do not hold this opinion. But the short term impact will be felt by the markets while uncertainty remains.

Outlook for US Economy

I believe that the main thrust of this impasse is partly due to President Obama’s health care bill and this is effectively being seen by some as a game of poker between the Democrat held White House and Senate, and the Republican held House of Representatives. Who will blink or fold first? As is usual in politics, I expect that some hurried negotiations will take place in some corners of Washington which will allow a new budget to be in place with a revised healthcare bill and the proverbial can will be kicked down the road again – possibly until there is a change of occupier in the White House or balance of power in the Houses of Congress.

At Chapters Financial Limited we remain optimistic for the outlook of the US economy and financial markets, although allocations to this area should be invested as part of an overall investment allocation process.

Past performance is not a guarantee of future performance. Fund values and currency values can fall as well as rise and are not guaranteed.

It should be noted that as financial planners, Chapters Financial remain positive about North America as an investment area and of the dollar as a currency.  

Each investment and its allocation/ recommendation is different and individual to the Client. To consider your circumstances with regard to savings and investments, you should take individual financial advice. No individual advice is provided in the content of this Blog. The team at Chapters Financial can help you with your planning and look forward to working with you.

Simon Hewitt

Financial Planner
Chapters Financial Limited

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.