“The latest round of green shoots in the economy could wither in the months ahead as U.S. politicians come to terms with huge spending and tax choices they have until now put off, says Mohamed El-Erian, CEO and co-chief investment officer of bond giant Pimco.
The Bush era tax cuts will expire at the end of 2012, as well as the broader payroll tax cut. Meanwhile, the yawning national deficit, so far financed by virtually zero lending rates, could be in danger of shooting much higher.
Long bonds saw a violent sell-off as stocks gained in recent weeks, although yields have since fallen back.
“For starters, the economy is not yet in a position to handle the 4 percent to 5 percent of GDP ‘fiscal cliff’ that is approaching as all of the hard political decisions that were postponed come into view at the end of this year,” El-Erian writes for Project Syndicate.
“The prospect of a disorderly fiscal contraction needs to give way to a more rationally designed approach that avoids undermining the fragile recovery,” he continues. “To accomplish that, the political class must avoid the bickering that almost sent America back into recession in 2011, and that raised major questions about the quality of the country’s economic governance.”
El-Erian also warns that the cost of gasoline will affect the pace of recovery.
“Oil prices are not helping. Having already surged on account of Iran-related geopolitical concerns, they are altering American consumers’ behavior, weakening their confidence, aggravating the country’s payments imbalances, and further reducing policymakers’ flexibility,” he writes.
Oil traded at $107.11 a barrel on Friday after touching above 108 on headlines that Iranian oil exports declined during the month. Oil has risen by $10 a barrel since the beginning of the year and gas is averaging $3.89 a gallon and well above $4 in many metro areas.
Experts are predicting a per gallon price peaking at $4.25 in April, reports the Associated Press.
“The market’s a powder keg with a very short fuse,” oil analyst Stephen Schork told the AP.”
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