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Debt ceiling and fiscal cliff increase economic uncertainty

Published: Monday, Aug. 20 2012 8:05 p.m. MDT

Using terms such as "ceiling" and "cliff" help paint the pictures that illustrate some of the more visible challenges the U.S. economy faces in the next several months. Neither hitting a debt ceiling nor falling off a fiscal cliff sound like the directions any prudent person would choose to go.

As a country, we are currently borrowing roughly 40 percent of every dollar spent by the U.S. government. It is likely the federal budget deficit for just the current fiscal year will total about $1.2 trillion. This annual borrowing figure does not include a range of other liabilities, such as unfunded Medicare and Social Security obligations and support for entities such as Freddie Mac and Fannie Mae, two government-sponsored guarantors of residential mortgage loans.

Current projections indicate the U.S. government will hit the approved borrowing limit sometime in late 2012 or early 2013. Depending on whether or not the fiscal actions scheduled to take place at year end are allowed to occur, hitting the debt ceiling might not happen until the end of the first quarter of 2013. Either way, Congress will need to approve an increase in the borrowing authority of the U.S. government in the not too distant future.

With these two potential disruptors on the horizon, it is no surprise the capital markets are concerned with the potential policy actions that may be enacted. As has occurred not so long ago, Congress may choose to play the game of political brinkmanship to deal with either of these issues. Both the stock and bond markets generally react negatively to such fiscal uncertainty.

Given the upcoming U.S. general elections, it is also possible interim borrowing extensions will be enacted in the next couple months. A similar delaying process is an option with the upcoming fiscal cliff. These actions will not resolve the underlying challenges and will serve only to postpone necessary actions. As can be observed by the responses of capital markets to the delaying tactics being followed in Europe, widespread and ongoing uncertainty regarding the fiscal direction of heavily indebted governments will eventually result in harsh treatment in the form of increased borrowing costs and falling equity markets.

Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.

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