Finance Notes (4):

Fiscal Cliff (財政懸崖) and Debt Ceiling Crisis (債務上限危機)

November 2012


Preamble: After a series of Quantitative Easing (量化寬鬆貨幣政策), signs of economic recovery in the United States are weak. After Obama's re-election, political bickering continued and the U.S. stock market down, why?


1.         What is the Fiscal Cliff (財政懸崖)

-        The root cause of the Financial Cliff can be traced back to 2001, George W. Bush, then president of the United States, launched the largest tax cut program in American history, worth the equivalent of $ 17 billion. The tax cut program was set to terminate in 2011. Obama and Congress reached an agreement to extend the tax cut plan to December 31, 2012. In the absence of tax incentives, consumers' spending power will be affected, but that is not all . . .


2.         What is the Debt Ceiling Crisis (債務上限危機)

-        In August 2011, the U.S. federal government debt hit the legal cap set by Congress. In order to prevent the government from getting into political and economic crisis due to lack of funds, the United States Congress raised the debt ceiling (債務上限) in August 2011, but at the same time required the federal government to cut government spending by $ 1.3 trillion in the next decade. According to the Budget Control Act (預算控制法案) passed by Congress, if the U.S. government cannot cut the expected amount of expenses, the Automatic Deficit Reduction Mechanism (自動減赤機制) will kick off in January 2013, resulting in an increase of 532 billion U.S. dollars of tax revenue and a reduction of 136 billion U.S. dollars of government spending. Economists believe that the U.S. economy will be seriously jeopardized when consumer and government spending weakens at the same time.