Another Financial Downturn?

If you are like many business people, you are probably wondering if the U.S. economy is headed for another financial downturn. The uncertainty from Washington makes that understandable.

What We Know

With the last minute legislation passed at the end of 2012, the tax rate picture is a little clearer. We now know that those in approximately the top 2% of income will pay a higher marginal tax rate. This in itself probably is not enough to cause a major financial downturn. In addition, we also know that the Affordable Care Act (also known as Obamacare) will be implemented and will have significant financial impact. In addition we also know that there are two lingering issues the government must address in order for businesses to have a clearer picture of what is to come; the debt ceiling and excessive government spending.

What We Don’t Know

Some things we do not know at this time are whether the President and Congress will be able to come to an agreement on raising the debt ceiling and cutting spending. Without an agreement on the debt ceiling we could see the U.S. fall into default on its debt. We also don’t know how much success there will be in cutting spending. After resolving the tax issue, I heard that this is supposes to raise $600 billion in new revenues over 10 years. So, that is $60 billions per year. If this actually occurs without any spending cuts, we are in even more financial trouble. Let’s look at this in a simplified manner.

The U.S. currently has $16.4 trillion in debt and each year is spending approximately $1.4 trillion more than it receives in tax revenue.

Another Financial Meltdown Chart

I think you would agree this is not a pretty picture.

What Does It All Mean

I think the bottom line is that we are almost guaranteed another significant financial downturn unless the U.S. Government can get its act together and reduce spending. The economy currently is very fragile, and continued uncertainly on the part of businesses as to what the country’s finances will look like over an extended period makes it very difficult to plan. As a result, many businesses will simply maintain the status quo and not make any real significant commitments to invest in growth.

Another recession at this time would be devastating to the country and its citizens.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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