Is Fed’s Bernanke Right About the ‘Fiscal Cliff’?
While Federal Reserve Chief Ben Bernanke forecasts 2013 will be a "very good year" for the world's largest economy if the "fiscal cliff" is avoided, one analyst argues a cliff-triggered recession is exactly what the U.S. needs.
"The best thing that happens is we go off the cliff. That (a recession) is what the U.S. economy needs," Paul Gambles, managing director at MBMG International, a financial advisory firm, told CNBC Asia's "Squawk Box."
The $600 billion in tax hikes and government spending cuts, set to take place in January 2013 if policymakers do not reach a compromise for avoiding them, are essential to debt reduction and the long-term balancing of the U.S. budget, Gambles said.
"If we extend the Bush tax cuts and carry on getting deeper and deeper in debt, believe me that's a lot uglier," he added.
In a speech delivered at the Economic Club in New York on Tuesday, Bernanke said 2013 could be a very good year for the U.S. economy if politicians reach a deal to avoid the "fiscal cliff." The central bank chief added that the Fed does not have the tools to offset the negative effects brought about by the economy falling off the cliff. (Read More: Full Text of Bernanke Remarks)
Failure to avert the combination of tax hikes and spending cuts is expected to result in an economic contraction of 0.5 percent next year, according to estimates by the Congressional Budget Office, but Gambles said delaying fiscal discipline would be even more detrimental for the economy.
"Nobody wants to have a recession, but they are part of the cycle, they are essential. We've been avoiding or minimizing recessions for the last 15 years or so. We've been getting away from reality, that's why we have these fantasy markets, asset prices that have no relation to reality," he added.
Stephen Wood, chief market strategist Russell Investments, disagrees the economy should be subjected to severe fiscal tightening, considering the fragile state of the U.S. economy.
"Like in drug addiction, you can't just get the guy off this stuff right away; you want to make it more sequenced," he said.
(Read More: Bernanke: No New Stimulus Despite Weak Recovery)
Wood argues that policymakers should buy some more time by avoiding the "fiscal cliff" at the moment to come up with credible, longer-term commitments to fiscal discipline.
"They haven't done all that much with the time that they have (already) bought. But if they buy (some more) time there can be a credible commitment," Wood added.
Gambles of MBMG International, however, disagrees that more time will help resolve the government's debt problem.
"We've been buying time since 2007; (I can't see any way) buying another year will make any difference," he said.
—By CNBC's Ansuya Harjani