WARNING: 2013 Recession Coming Says CBO

In a sense, the CBO argues for the status quo due to "the current state of the economy, immediate spending cuts or tax increases would represent an added drag on the weak economic expansion."

The expiration of all the "Bush" tax cuts, including those for the middle class and the poor, will strike midnight on New Year's Eve.  Additionally, some of the automatic spending cuts from the 2011 debt ceiling hike deal are also scheduled to take effect in 2013. Although, the agency concedes increases in taxes will be more hurtful than spending cuts - some call it Taxmageddon.

The CBO says the combination will cut the deficit by $607 billion between fiscal years 2012 and 2013. However, the impact will weaken the economy and "lower taxable incomes and raise unemployment, generating a reduction in tax revenues and an increase in spending on such items as unemployment insurance." As a result, the net reduction in the deficit will be reduced to $560 billion.

According to the CBO's projections, raising taxes and cutting spending will cause the economy to contract by 1.3% in the first half of 2013 and then grow by 2.3% in the second six months of the year. If Congress and the President agreed to leave things as is, extending all the tax cuts and continuing to spend at the same levels, CBO says the economy would grow by approximately 4.4% in 2013 – inset laugh track.

However, we are all damned if we keep the status quo as the report did a Yosemite Sam, he went that way, while crossing arms and firing in every direction. The longer the Federal Government waits to address annual deficits, the bigger the debt problem will become – see Greece, Spain, Portugal, Italy, Ireland…

In the same analysis, CBO warns, "Large budget deficits would reduce national saving, thereby curtailing investment in productive capital and diminishing future output and income. Interest payments on the debt would consume a growing share of the federal budget, eventually requiring either higher taxes or a reduction in government benefits and services.

In addition, rising debt would increasingly restrict policymakers' ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or international crises. Growing debt also would increase the likelihood of a sudden fiscal crisis, during which investors would lose confidence in the government's ability to manage its budget and the government would lose its ability to borrow at affordable rates. Moreover, the longer the necessary adjustments in policies were delayed, the more uncertain individuals and businesses would be about future government policies, and the more drastic the ultimate changes in policy would need to be."

Considering the choices as spelled out by Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013, iStock feels a six month contraction of 1.3% seems like less pain than a sudden fiscal crisis and a loss of confidence. Can you say 2008?

It's either pay now or pay more later.

This writer believes Connie Mack's bill, H.R. 1848 seems like the least painful solutions. Mack suggests cutting one-penny-out-of-every dollar a spent by the federal government for six years, and starting in year seven, capping spending at the historic rate of 18% of GDP. By year nine, the Federal Government would be running at a surplus provided revenues move back to 18%. They have been closer to 15% during the "great recession."

Additionally, a nine year plan with set spending limits, fixed tax-rates, and a serious attempt to get the fiscal house in order would instill confidence and help get our AAA rating back.

In all likelihood, removing uncertainty would bolster the private sector and help the economy grow faster than projected, which, in turn, would help build confidence and payoff the nation's bills faster than predicted by H.R. 1848.

Let us know what you think should be done. Email us at Rich at wallsttools dot com.