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News Link • Government Debt & Financing

America's Fiscal Dead End: A 2013 "Minsky Moment"

Conventional wisdom holds that if the economic recovery progresses as expected, President Obama will be re-elected. At the same time, assuming the Ryan plan does not backfire, the political winds may favor a Republican takeover of the Senate, given that nearly twice as many Democrats in the Senate are up for reelection as Republicans, and only a three-vote swing is needed. A Democratic President dealing with a Republican Congress and a popular mandate to resolve the fiscal problem would be a repeat of the conditions that led to the last major fiscal reform move with President Clinton in the early-mid 1990s. And Obama would have the added advantage of being a second term president. This mix would necessitate a political compromise in a case where compromise will clearly be needed to achieve a lasting resolution. However, there are no guarantees that such a scenario would materialize, and even if it did, deep-seated political differences on taxes and spending could still prevent a resolution of the problem in 2013. In this case, markets could very well balk, leading to a US Minsky moment, with potentially far greater consequences than the one Europe has experienced.

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