The deal that reached just on time saved the US from another fiscal cliff, said Nouriel Roubini, the chairman of Roubini Global Economics, in an opinion piece published in the Financial Times newspaper. However, Roubini said that the U.S may soon face another economic crisis, given the unsteady nature of the country’s political system.
Roubini, who is also known as “Dr Doom” for his pessimistic economic predictions, said that the deal that reached Washington of New Year’s day is a temporary solution to the country’s current economic crisis. If no action is taken within next two months, the U.S. economy may get into serious problem.
The US will reach its statutory debt limit, also known as the debt ceiling, by the end of February. The debt ceiling can be extended only if Republicans and Democrats agree to sign an agreement. The US government may need to start a spending cut of $110bn by March 1.
“It won’t be long before there is another crisis. Two months, in fact.” Said Roubini, “That is only the beginning later in 2013 a bigger debate on medium-term fiscal consolidation will begin.” Roubini also said “a big fight about entitlements should be expected as well as a series of little fights over tax reforms” and the whole process will likely “soon get messy.”
So, Roubini expects that President Barack Obama and his allies will argue for further tax rises, at least for the wealthy people. On the other hand, Republicans will argue that spending should be cut. Roubini also warns that if the euro zone begins to unravel, “the US could quite easily come perilously close to stall speed this year.”
“Neither Democrats nor Republicans recognize that maintaining a basic welfare state… implies higher taxes for the middle class as well as for the rich,” Roubini writes, “It will probably take years for the US to confront the reality of its fiscal position … Large fiscal deficits will remain the norm for the next few years at least as long as the bond market remains quiet, as I believe it will.”
Roubini said that the wakening of bond vigilantes is quite expected but sooner or later they would “wake up.”
“The ‘mini deal’ on the fiscal cliff dodged all the important questions. By not including the spending cuts in the deal, the Democrats have emboldened Republicans. It is again up to Washington’s policy makers to fix the problem before the market does it for them,” he wrote, warning that this would not happen “with any ease.”