Politicians are finally addressing the issue of the deficit. But ultimately, there's a right way and a wrong way.
Ahead of the World Bank/IMF meetings in DC this weekend, the IMF warned the United States on their fiscal deficit and requested an austerity plan to deal with the red ink. Carlo Cottarelli, head of the IMF's fiscal affairs department, urged the U.S. to move soon in agreeing to a plan to contain the country's public debt, which in 2010 rose to more than 90% of gross domestic product, or the economy's total output according to Dow Jones. Adding insult to injury, he said "If I look at fiscal fundamentals, I see the situation in Europe improving faster than in the U.S.," he said, adding that Portugal should be the last euro- zone country to need a bailout from the European Union and the IMF.
Today, President Obama does his best to wrestle control of the political movement to reduce the massive US short term and long term fiscal deficit. It’s amazing how fast the President has pivoted on this issue from wanting more spending and stimulus to recognizing the deficit issue is not just a long term problem to be dealt with in the future. This is very encouraging, but the details matter.
The Ryan reduction plan announced last week is the baseline architecture for the Republicans and for the political narrative in DC. President Obama will present his structure today, but we’re already getting leaks on it. Not surprisingly, he will push for higher taxes for the rich as polls show most Americans support taxing the wealthy. Of course, most Americans earning over 100k don’t consider themselves wealthy.
The Obama plan will stand in stark contrast to the Ryan plan that had steep cuts in spending and lower taxes for businesses and individuals while removing most deductions/exemptions. The Ryan plan errs on the side of making the United States more competitive in the world tax environment instead of trying to expand the tax base. This is the same conclusion that the British came to with their austerity plan.
The best news is that politicians are finally waking up to dealing with the issue. Ultimately, both plans will be initially beneficial for easing bond market and IMF concerns over the direction of the US fiscal situation. However, the closer the US gets to the Ryan plan, the better the outcome will be for the economy, job growth, and the US dollar. It's a question of whether the US wants to look like Japan versus China in the future.
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a contributor to CNBC's Money in Motion Currency Trading.You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.
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