The New Nostradamus: The IMF, the US and the Fiscal Cliffhanger

The French soothsayer, Michel de Nostredame or Nostradamus, became something of a celebrity starting in the 1550s because of his prophecies in all he made 6,338 predictions in a series of almanacs — everything from plagues to invasions to the end of the world. People still raise his name today when they speak about impending danger (remember Y2K?).

Our own version of a Nostradaman prophecy may be the upcoming fiscal cliff at the end of the year, which has been painted in similarly dire terms. The latest is the IMF, which in the process of shaving its 2013 forecast for global growth to 3.9 percent from its previous 4.1 percent, also issued a sober warning about the scheduled expiration of Bush-era tax cuts and $1.2 trillion in automatic spending reductions which will hit the US at the end of the year.  If the United States failed to deal with the “fiscal cliff” it could potentially be an “enormous shock” to the U.S. and other advanced economies, IMF Chief Economist Olivier Blanchard told a news conference that if all the provisions go into effect, they would take more than $500 billion out of the economy in 2013 alone.

The mix of tax increases and spending cuts would slash the deficit in half – to 3.8% of gross domestic product, down from the 7.6% projected for this year. The IMF has recommended a slower course of deficit reduction, so that it drops by just 1 percentage point next year. “A more modest retrenchment in 2013 … would be a better option,” the IMF said.

A new study conducted for the Aerospace Industries Association says the cuts in federal spending will cost the economy more than 2 million jobs, from defense contracting to border security to education, and reduce the nation’s gross domestic product by $215 billion next year, if Congress fails to resolve the looming budget crisis.  Add to this the fact that the country’s debt load will near its legal limit of $16.394 trillion next year, requiring the political theater of Congress raising the debt ceiling to pay all the bills the government has incurred.

As with Nostradaman prophecies, the worst part of all of this isn’t the actual event (which often passes with a whimper) but the uncertainty and paralysis that precedes it. As these warnings build, the markets roil, ratings get cut, businesses sit on their money in a case of nerves and people pull back on buying government debt because the US starts  to look like a risky bet.

History proves it’s not so much the prophecy as the press around it.