2013: US Economy Faces Huge Uncertainty

Recently, U.S. Federal Reserve Chairman Ben Bernanke publicly announced his cautious optimism toward the U.S. economy. At the same time, he emphasized the vulnerability of the current U.S. economic recovery, as well as the urgent need to raise the country’s borrowing limit. The U.S. debt, the world’s safest asset, is brewing the world’s biggest uncertainty.

At the end of 2012, the end of the world did not come about. The successfully re-elected U.S. president, Barack Obama, was still busy in the battle against Congress regarding the issue of the fiscal cliff. Even once both parties reached a compromise — which they could not do until the last moment — the bill that they did pass did not solve the problem. Instead, it created another, even sheerer fiscal cliff for March 1, 2013. In fact, as early as Dec. 20 of last year, avoiding the fiscal cliff of 2012 became even more difficult after House Speaker John Boehner failed to rally enough support for his proposed “Plan B.” As a result, Obama’s last-minute push on the fiscal cliff deal was more of a political statement than a concrete negotiation. As the Washington Post pointed out, the current atmosphere and situation is making people feel that this is a repeat of the farcical arbitration that surrounding the 2011 debt ceiling talks. Many U.S. investment banks predict the fiscal cliff will result in an economic contraction of up to 2 percent of GDP. This obviously bears heavily on U.S. economy, which had previously begun to recover and head down a stable path.

For the moment, the enacting of automatic federal spending cuts and the raising of the debt ceiling have been unavoidable. Although the White House will definitely pass other bills to extend tax deduction policy for as long as possible for middle and low-income people, the Republican Party is more likely to get a victory. The first and foremost reason is politics. Currently, the split of two U.S. political parties makes the possibility of cooperation slim. After the Republican Party made a concession on the tax increase plan, it is especially impossible for them to make any further substantial concessions. Another reason comes simply from an economic standpoint: Reducing expense fits the U.S.’ current public interest. Decreasing the burden of social welfare is a necessary step on the path to reshape American competitive power.

Due to these factors, Obama is facing pressure from three sides. First is the pressure from Congress. The Republican Party will adhere to expense reduction and will use the debt ceiling as bargaining chip. Second, there is pressure from the Wall Street. The financial market will be very unwilling to see financial turbulence incurred by a drop in credit rating for the U.S. government debt. Lastly, Obama will face pressure from foreign countries after the debt ceiling gets raised again. The world’s major economies have begun to realize that global economic systems based on the hegemony of the U.S. dollar are facing increasingly large adjustment pressure.

While the debt issue is still up in the air, the Fed is utilizing its ability to print cash to support the U.S. economy. At the end of 2012, the Fed announced that when “Operation Twist” expires at the end of the year, it will continue purchasing monthly $40 billion worth of mortgages to support mortgage-backed securities, while continuing to buy additional monthly $45 billion long-term Treasury bonds. Meanwhile, the Fed will continue reinvesting both expired sector bonds and mortgage-backed securities for principal reinvestment. This so-called “QE4” plan did not come as a surprise; Bernanke’s firm confidence derives directly from the academic belief that he holds as the appropriate response to crisis: provide enough liquidity.

At this time, the Fed announced a change, clearly stating it will continue maintaining the federal funds rate to the extremely low level range of 0 percent to 0.25 percent as long as the unemployment rate remains above 6.5 percent; inflation between one and two years ahead is predicted no more than a 0.5 percentage points above the Committee’s 2 percent long-term goal. This new announcement objectively revealed the Fed’s judgment on future economic trend: the road to economic recovery will be a rough one, but the Fed is determined to provide adequate liquidity for the market. It is noteworthy that part of the committees doubted the rationality of enforcing Plan QE3 in 2013 and in coming years, according to last December’s Monetary Policy Report, which was issued this month. The latest change displayed the internal Fed’s hidden worries of the long-term Easy Monetary Policy, which has become another uncertain factor influencing America’s 2013 economy tendency.

The author is a doctor at the Institute of Economics — Chinese Academy of Social Sciences.