Now that the 2012 elections have been decided, we have to deal with the reality of the rapidly-approaching fiscal cliff. To summarize the bidding, we have President Obama for four more years, a heavily conservative House of Representatives and a Democrat-controlled Senate to determine the legislative agenda beginning in 2013. Before we can speculate on what will happen next year, we still have the possibility that Congress and the President will deal with our current problems in a "lame duck" session before the end of the year.
The current problems (translated as "fiscal cliff") include, in no particular order: (1) agreeing upon a budget for fiscal 2013, (2) increasing the debt ceiling which will be met before the end of the year, (3) the need to come up with $2.1 trillion in discretionary spending reductions (not entitlements, such as Social Security or Medicare) before year-end or face sequestration (i.e., automatic spending cuts), (4) expiring Bush 2001 and 2003 tax cuts and tax increases under 2010 Health Care reform act, which will result in the largest tax increase in U.S. history.
The question is whether the outgoing Congress and the President will have the mettle to deal with these thorny issues in a very short timeframe. Some are predicting they will do so before the end of the year. Others believe that they will agree upon a very short-term extension of the tax cuts, a temporary increase in the debt ceiling and "kick the can" down the road for the next Congress to deal with. Still others predict that the Congress and President will unwittingly allow the U.S. to fall off the fiscal cliff, causing automatic cuts and tax increases to come into effect, only to reach an agreement in early 2013 to roll back many of the dire consequences of doing nothing before year-end. The real "optimists" believe that the stalemate will continue well into 2013.
In any situation, we probably will see a continued negative response by the equity and debt markets until a resolution can be reached. The day after the election the Dow Jones Industrial Average had its worst day of 2012, dropping 313 points or 2.36% as investors worried about the economic health of the eurozone and the effects of tax increases and spending cuts set to go into effect in 2013. The S&P 500 and the Nasdaq also suffered serious declines, falling 2.37% and 2.48%, respectively. Some economists are predicting that the U.S. will plunge into a deeper recession than 2008-2010 if Congress and the President to no get their cumulative acts together.
Until we know more, we can only speculate about the future. As soon as I know something more concrete, I will keep you updated through this blog.