As Fiscal Cliff Nears what actions to prevent the automatic trigger of $600 billion of tax hikes and spending cuts in January
(PIMCO expects) Congress to strike "a mini-bargain" that shrinks GDP by up to 1.5 percent. "That is something the economy can absorb without going into recession," he said.
I think after the election and before Christmas, when discussions might be most polarized and feverish, is the most likely time you'll see doubts in the markets and an extra risk premium demanded to hold U.S. assets," said Alan Wilde, who helps oversee $50 billion at Baring Asset Management.
As Congress has punted on the hard decisions, the numbers have hardly changed: Federal red ink is expected to total more than $1 trillion in 2012 for the fourth straight year.
If the full $600 billion in taxes and spending cuts were to take effect, economists at Credit Suisse said the hit to the U.S. economy would be sharpest in the first quarter of 2013, with a 5 percent decline in annual gross domestic product, and that the U.S. unemployment rate could rise to 10 percent.
Falling off the cliff would also hurt Europe, posing risks for global growth.
If the entire menu of tax hikes and spending cuts were to take effect at once, it would amount to the most severe fiscal tightening since the 1969 tax increase passed to pay for the Vietnam War. This time, the CBO estimates the economy would shrink by 0.5 percent in 2013, with a crushing first-half contraction of 2.9 percent.
In this worst-case scenario, Credit Suisse said investors should take refuge in defensive sectors such as health care, consumer staples and utilities and avoid homebuilders, machinery and energy stocks.
another risk: the ratings agencies.
Earlier this month, Moody's said it too could strip the United States of its top credit rating if Congress does not agree to policies that ensure long-term deficit reduction.
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