Should the U.S. Avoid the Fiscal Cliff, Recession?

By Stevie Duffin Updated on 12/14/2012

By Daniel Duffield

Federal Reserve Chief Ben Bernanke anticipates a strong year for the U.S. economy during 2013 if avoiding the fiscal cliff can be achieved, although one analyst proposes that the potential recession caused by the fiscal cliff could be exactly what the country needs.

According a statement from Paul Gambles, the managing director at MBMG International, a firm devoted to financial advisory, the optimal solution is that the U.S. undergoes the recession after confronting the fiscal cliff.

The $600 billion in tax increases and government budget cuts, planned to initiate in January 2013 if lawmakers do not work to avoid these measures, will provide debt reduction and stabilize the U.S. economy in the long-term, said Gambles.

Gambles believes that any extension of Bush-era tax cuts will push the national debt further, exacerbating the current situation.

In a speech presented at the Economic Club in New York on Tuesday, Bernanke stated that 2013 could be a year of healthy recovery for the U.S. economy if politicians avoid the negative potential of the fiscal cliff. In addition, Bernanke added that the Federal Reserve does not have the necessary capacity to compensate for the negative repercussions of a new recession.

According to assessments by the Congressional Budget Office, the failure to circumvent the combination of budget cuts and tax increases will produce an economic contraction of 0.5% in 2013, however, Gambles states that delaying this effect will be far more damaging if prolonged.

Gambles states that although no one would like to have a recession, these economic conditions are a critical part of the cycle and that the U.S. avoidance of recession during the last 15 years has resulted in overblown markets and prices that carry no weight in reality.

Stephen Wood, chief market strategist for Russell Investments, considers the U.S. economy to be too delicate at present to endure such significant fiscal constriction, comparing the situation to a drug addiction, in which an addict cannot immediately quite the substance.

Wood claims that policymakers should prolong the confrontation of the fiscal cliff in order to devise a more long-term solution, stating that more time could lead to a “credible commitment.”

Gambles disagrees and believes that this extra time will not solve the U.S.’s economic woes. In addition, he stated that although the U.S. has been attempting to prolong the recession since 2007, another year of waiting will make no difference.