There has been plenty of talk about the "fiscal cliff," but that, unfortunately, isn't the only "cliff" threatening the U.S. economy. Here are three more that might push our economy back into another recession.
There has been plenty of talk about the “fiscal cliff,” but that, unfortunately, isn’t the only "cliff" threatening the U.S. economy.
The fiscal cliff refers to the several major tax cuts that are set to expire on Jan. 1, 2013, as well as some large spending cuts that would take effect at that time. If all of those taxes come into effect at the same time, it could push the United States into another recession.
Federal Reserve Chairman Ben Bernanke kicked off the fiscal cliff panic in February when he testified before the House Financial Service Committee:
“Achieving long-run sustainability and providing comfort to the public and the markets that deficits will come under control over a period of time — that's very important for confidence and for creating more support for the recovery. But at the same time, I think you also have to protect the recovery in the near term. Under current law, on Jan. 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date."
However, if played right, the savvy investor might actually be able to take advantage of the coming fiscal cliff and benefit later down the line.
Business Insider recently brought to light eight other cliffs (such as the Japan’s fiscal cliff and the Federal Deposit Insurance cliff) that could affect the U.S. economy going forward if something isn’t done.
Here are three:
Drug patent cliff
As physicians, you’ve probably been hearing about this for a while now. Big pharmaceutical companies have been losing patents on drugs for years, but this is a crucial time because the number of expiring patents has been piling up for some companies.
Patents on big-name drugs like Lipitor, Zyprexa, Plavix and Singulair all expired this year. The loss of those patents has forced pharmaceutical companies into a corner, especially since the Food and Drug Administration is on pace to approve fewer drugs in 2012 compared to 2011 and the research and development for Big Pharma companies has been lagging, taking longer to churn out a successful drug.
Unless pharmaceutical companies “fix” this problem, they’ll find they’re losing money to generics.
Global economy cliff
The U.S. economy isn’t the only one that’s been sputtering. Almost every day there’s discouraging news coming out of Europe or reports are showing that China’s growth is slowing.
In fact — and this might sound scary to some — when compared to other developed countries, the U.S. economy is looking incredibly strong. In 2011 the stock market returns in the U.S. were positive, which wasn’t true for almost any other country (except Indonesia).
Just on Wednesday the markets overreacted and tanked on the news that recent reports out of Germany showed an economic slowdown.
Corporate earnings cliff
People have been very scared of the stock market after the recession in 2008, which cost some investors the majority of their savings. That hesitation to get back into the market just meant that people were missing out on record-breaking returns as the market came roaring back.
Earnings have been up for nine quarters, according to Investment U. Those climbing profits have been, in turn, pushing the market up despite the doom and gloom investors have been feeling.
Unfortunately, the ride might be about to end. Hedge fund consultant Michael Belkin and equities analyst Barry Ritholtz have both expressed concern about the corporate earnings cliff. According to Ritholtz, it may just be that the U.S. is coming to the end of its cyclical bull market, which means we’ll be entering a bear market. It won’t be as bad as the last recession, but it wouldn’t hurt to be aware of it.