On December 31, 2012, the phrase “The Fiscal Cliff” began dominating different forex investors’ forums. Many economists, government agencies, as well as traders, are going all over the place as they suggest that when it comes to their fate in foreign exchange markets, they’re pretty much doomed. But, what is it? And, on that note, is it really something to be worried about?
The Fiscal Cliff Defined
The Fiscal Cliff, believed to be first uttered by economist Alec Phillips, is defined an economic event that is capable of causing foreseeable and unforeseeable economic collapse. Behind it, the concept is that if the federal government gave its permission for government spending cuts together with expiring tax cuts to be made, market conditions will become twice as shaky. The list of things it will result to includes higher unemployment rates, decreased household incomes, increased social security payroll taxes, reduced values of estates, reduced federal budget deficits, and undermined trader confidence.
If It Causes Problem, Why Was It Created?
“The result of going over The Fiscal Cliff seems impractical. However, several arguments have emerged and all of which are suggesting that the event thought to be a disaster is actually a good thing in the upcoming years”, Stated by Rohan, A Forex analyst from MTrading.in, A Forex broker from India. According to the statements, by letting the government work on its shortcomings, the possibility of lower debt and better growth potential isn’t pushed aside. “Just consider it bitter medicine”, as some would say. Especially if you’re an investor who thinks about the unexpected turns that are yet to come, you may agree.
There are numerous debates about it:
- A safer approach (i.e. one that doesn’t put different forms of investments and securities at risk) would have been appreciated
- Some aspects such as household income, social security taxes, and estate values should have been left untouched
- The economic event should have been scheduled at the middle of 2013, instead of at a time when cuts would weigh heavily on almost everyone
So, Is It a Problem or a Solution?
The bottom line is, The Fiscal Cliff, having either a positive or a negative connotation, depends on your own perspective. Sure, since it makes way for a ton of damages to be caused, you can’t help but view it as a start of a financial crisis.
However, it’s an apparent sign that authorities are taking action and are not allowing market conditions to be dictated by unknown forces. Granted you’re willing to strategize and improve your current standings as a trader, finding a way for the event to be beneficial to you is possible.