Pimco’s El-Erian: Chances of US Recession Surge as Fiscal Cliff Talks Stall

Friday, 21 Dec 2012 01:30 PM

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A decision by House Republicans to cancel a vote on House Speaker John Boehner's fiscal-cliff proposal increases the chances the U.S. economy will plunge into a recession next year, said Mohamed El-Erian, CEO of fund giant Pimco.

The rebellion against Boehner among his fellow Republicans stalls a deal with the White House to craft a 2013 fiscal framework and avoid what many see as a preventable recession.

Sweeping tax hikes are due to take effect at the end of this year at the same time deep cuts to government spending kick in, a combination known as a fiscal cliff that could tip the country into recession next year, according to both government and private-sector estimates.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

The White House and Congressional Republicans have centered the debate on income taxes, with the Obama administration calling for tax hikes on incomes over $400,000 a year, and Boehner countering with a proposed hike on incomes of over $1 million a year, a proposal dubbed as Plan B that quickly found opposition among his own ranks.

Get a deal soon and end the political grandstanding, even with political parties, El-Erian wrote in a CNBC Guest Blog, or the chance of recession becomes increasingly likely.

"In order to avoid a recession that would aggravate the country's unemployment problem and reignite concerns about housing and household finances, Democrats and Republicans need quickly to find a way to work together. While possible, it is hard to see how this happens endogenously. There are lots of divisions, and at many levels," El-Erian wrote.

"Thursday's collapse of Speaker Boehner's Plan B unfortunately makes it more likely that the fiscal cliff may materialize, constituting a blow to a recovering U.S. economy."

Markets could soon roil and force action, something lawmakers don't want to experience.

"The 2008 experience with TARP — where the market and economic dislocations that followed the initial congressional vote rejection quickly forced politicians to cooperate — suggests that there is nothing like visible turmoil to get our bickering political parties to come together properly in the national interest," El-Erian wrote.

"Let us hope that the political system responds in a similar fashion in the coming weeks, if not earlier. There is a lot at stake."

Market watchers are growing increasingly anxious.

“With such a staunch group in the House, it looks as if the odds of going into 2013 without a deal have increased,” Kevin Caron, a Florham Park, New Jersey-based market strategist at Stifel Nicolaus & Co., which oversees about $130 billion in assets, told Bloomberg.

“I don’t know whether we’re going to reach a deal, when we’re going to reach a deal, if there’s going to be a deal. It’s just a complete wild card at this point.”

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

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