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A bond’s-eye view of the world

Wesley Phoa
Portfolio manager/investment analyst
Based in:
Los Angeles
Investment experience:

WESLEY PHOA: If we fall off the fiscal cliff, then we don’t just get a sharp economic downturn. We also get a large fall in the deficit and an improvement in our debt ratios. The fact is fiscal consolidation over some time frame is something that we have to do — and if we do, it will be beneficial. And by the way, estimates about the size of this fiscal cliff are 4–5% of GDP, depending on what you decide to throw in. That’s what Italy has done already. That’s what Italy had to do. They’re suffering very predictable economic consequences from it, but [it] wasn’t necessarily the wrong thing.

The problem with the fiscal cliff, to me, is one of timing and efficiency: timing because you don’t want to do it all at once — that’s not good — and efficiency because you’re imposing a lot of revenue hikes and cuts and outlays in a somewhat uncoordinated way, rather than properly planned.

It’s really difficult to make calls on politics, but my own view is that a number of things have changed in Congress which make me more optimistic about some kind of reasonable resolution of these expiring fiscal measures. We’ve seen the dynamics change on the Republican side and on the Democratic side, and in the interaction between the two. More coordination on both sides is good for getting an outcome.

Finally, one of the big mistakes that was made in negotiations last year was having these gangs of people working on the side, so that you had negotiations going along on these different tracks between the White House and [House Speaker] Boehner versus the gang in the Senate. These deals would collide with each other, and in the end, you would have a very bad outcome. I think that that’s a problem that both sides are aware of and they’re going to try and avoid this time.

So I think — no doubt about it — it’s going to be very messy, and we’ll have things thrown into a bill at the last minute. But I’m pretty optimistic that we’ll get some kind of resolution about the fiscal cliff.

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