WEEKLY COMMENT 16-11-2012 By Barry Edwards

The American presidential elections produced the expected result and have created the predicted further uncertainty in financial markets mainly because of the stalemate in congress which is still controlled by the Republican Party.
In effect, this means the Democrats and Republicans have to agree on the budget for America for the next year, referred to as the ‘fiscal cliff’, which is causing reservations amongst investors who have little faith in compromise being achieved before the final hour.
The USA government cannot increase the amount of government bonds that can be issued without the consent of Congress. Therefore, before permission can be given to the USA Treasury to instruct the Federal Reserve (the central bank) to issue bonds to cover the fiscal deficit, agreement must be reached. The fiscal deficit is the difference between the amount of tax raised and the forecast expenditure by government for the next fiscal year which for 2013 is estimated to be about $1000 billion.
You might say ‘well what has that got to do with us here in the UK?’ The reason is that the USA economy is still the largest in the world and does have an effect around the world purely by the impact of the purchasing power of government and business that affects all other countries worldwide.
Although the emerging market economies are expanding, they are still partly dependent on American imports to maintain that growth. Any doubt about this is reflected in financial markets and depresses confidence.
In Europe, the USA election has not changed anything dramatically; however public reaction to the austerity being imposed in the Mediterranean countries is beginning to dominate the news causing concern for the politicians. We will have to see whether this resistance to the severe government cutbacks becomes more intense to make a judgement on the effect it will have on decision making and the survival of the Euro itself.
That is a brief summary of the markets and the general economic situation in the last week. read more

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