fiscal cliff" that as of now will hit taxpayers and the country in 2013.
The fiscal cliff refers to the numerous tax increases and steep spending cuts slated to go into effect Jan. 1, and will throw the already struggling U.S. economy back into a recession.
In his semi-annual monetary report to the U.S. Senate, the chief voiced his concerns. What was missing though was what Congress should actually do to hammer out a budget deal that would prevent a fiscal cliff.
"I don't have a specific recommendation, other than to think not just about the individual policies, but of the collective impact. Congress is in charge here," Bernanke said.
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Fiscal Cliff: Bernanke Urges Congress to Take Action
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How the Fiscal Cliff will Deal a Blow to U.S. Defense Industry
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At the end of this year, current tax policies are set to expire and new ones will go into effect at the start of 2013. What Americans can expect if the policies are not extended is a painful combo of tax increases and spending cuts that will thrust the struggling U.S. economy back into a recession.
If U.S. lawmakers fail to act, scores of economists agree what we'll get is a $600 billion drag on the already sluggish economy. The tax implications have been widely discussed, but there has been little chatter about the impact on the defense sector, which stands to sorely suffer since it is subjected to half of the proposed spending cuts.
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What is the "Fiscal Cliff"?
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Fiscal cliff anxiety has increased since May 22 when the Congressional Budget Office spread some gloom and doom by citing a potential 2013 recession.
As we reach 2012's midpoint, we still have November's presidential election and a ticking clock for Congress and the president to reach an agreement on policy issues by year's end.
The likelihood of this doesn't look good. That's why now's the time to prepare for the potential effect from the fiscal cliff.
What is the Fiscal Cliff?
You can thank Federal Reserve ChairmanBen Bernankefor coining the phrase.Fiscal cliff refers to the coinciding action of tax increases and spending cuts that will activate on Jan. 1, 2013 unless Congress and the White House agree and take some action to either delay or change them.
Should these two actions marry, you'll watch $7 trillion tagged onto the nation's debt over the next decade, or about $500 billion next year, according to CNN.
How will investors be impacted?
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How I Learned to Stop Worrying and Love the Fiscal Cliff
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It sounds crazy, given all the dire predictions economists are making about the "Taxmageddon" that will arrive on Jan. 1, 2013.
While true, no one is talking about what would happen to the economy after the fiscal cliff crisis of 2013.
If Congress fails to act and allows all the bad things to happen - the expiration of the Bush-era tax cuts and the payroll tax cut, as well as the enforced spending cuts (sequestration) agreed to in the budget deal last year - the federal budget deficit would start shrinking dramatically.
And the fiscal discipline, while brutal in the short run, would jump-start the economy by early 2014.
It's all in a recent Congressional Budget Office (CBO) report, "Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013."
The CBO ran projections based on two scenarios.
One looks at what would happen if Congress does nothing and lets the country go over the fiscal cliff. The other scenario looks at what would happen if Congress dodges the fiscal cliff by extending most, if not all, of the current policies.
Choosing to take a leap off of the fiscal cliff--as has been widely reported-- would slam an already faltering U.S. economy. The CBO report says GDP would shrink by 1.3% in the first half of 2013, pushing the country back into a recession.
On the other hand, extending current policies would push GDP up 5.3% in the first half of 2013.
That may sound great, but a funny thing happens after those first six months.
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