RICHARD KOO: If History Is Any Guide, Hitting The Fiscal Cliff Will Lead To 'Economic Meltdown

"In his new note, Nomura's Richard Koo comments on the fiscal cliff (the automatic spending cuts and tax hikes that will kick in this year if Congress doesn't do anything), and a CBO report that anticipates a mild recession if that happens.

...I think the CBO estimates of a 0.5% contraction in output and a 9.1% unemployment rate are overly optimistic. Under current conditions it is extremely unrealistic to assume that a tax hike equal to 3% of GDP will only depress GDP by 0.5%.

In Japan, the Hashimoto administration undertook a fiscal consolidation program equal to 3% of GDP in 1997. The result was an economic meltdown, with data at the time indicating five straight quarters of contraction. GDP shrank by 3.0% in real terms and 4.0% in nominal terms. The resulting double dip sparked major bad loan problems in the banking sector, and the fiscal deficit, originally projected to decline by ¥15trn, increased by ¥16trn instead..."

at http://www.businessinsider.com/richard-koo-on-the-fiscal-cliff-2012-8#ixzz24rlE9Csc