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The fiscal cliff cannot be allowed to occur or the economy will go into a recession. A fresh round of job cuts is the last thing the real estate market needs just as it is emerging out of a prolonged slump. A likely outcome would see small tweaks to buy some time until next spring for a more substantive tackling of the extraordinarily high and unsustainable federal budget deficits.
Common sense suggests the very budget deficits cannot continue forever. And this sentiment is right-on because at some point bond investors will get wary of lending to anyone or any entity that carries unsustainable high debt. Printing money to pay off the debt would legally avoid default, but that also carries unpleasant risks. The subsequent higher inflation acts as a tax in lowering consumer purchasing power. Mortgage rates will commensurately rise with inflation as well, thereby cutting into housing affordability.
It is therefore worth reviewing simple charts to help us digest how the budget deficit went up the through the roof. The charts below show 12-month federal tax receipts and 12-month federal government outlays. The two charts are then laid over one another to clearly show the deficit gap that has opened up. Should the gap (the deficit) be closed more via spending cuts or through higher tax revenue?
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