The Fiscal Cliff: Don’t Panic, It’s Only Improbable

on December 23 2012 4:30 PM

On Thursday evening, the House of Representatives cancelled their vote on Speaker John Boehner’s (R-Ohio) “Plan B” solution to the fiscal cliff. Boehner was unable to gather the necessary support from his party because of the tax rate increase on Americans earning over $1 million per year that was part of the proposal.

It was “certainly a victory for conservative principles,” said Tim Huelskamp (R-Kansas), about the failure of Boehner’s proposal. It “didn’t solve the problem but it avoids creating bigger problems, Republicans caving on core principles,” he told reporters, according to Bloomberg.

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His remarks seem punctuated with the hammering of nails into the country’s fiscal coffin. Core GOP principles are seeded in fiscal responsibility, but Huelskamp’s comments touch on what looks like a perversion of reason as America wobbles toward an austerity crisis. The difference between Boehner and many members of his party, it seems, is that the Speaker is willing to compromise on some of Republicans’ basic values for the sake of avoiding the impending fiscal cliff, which many believe could stall economic progress in the U.S., perhaps even leading to another recession. Meanwhile, hard-line conservatives not only appear unwilling to budge, but are taking pride in their unwavering position, making it appear unlikely than any proposal that would increase taxes will be accepted by the House.

If the same sentiment — that any concession is a violation of core principles — is echoed by Democrats, then the country could find itself falling over the fiscal cliff in a little over a week’s time. The markets have underscored the current chapter in Washington’s discourse by shedding over a full percentage point from the the major indices on Friday morning.

Where are we now, and where are we going?

The U.S. Department of Commerce recently issued its third estimate for third-quarter GDP growth, revising its previous calculation of +2.7 percent to +3.1 percent. Good news for an economy flirting with another recession, and particularly strong coming out of just 1.3 percent GDP growth in the second quarter.

On Friday, the Commerce Department reported that both personal income and disposable personal income increased 0.6 percent in November. Personal consumption expenditures increased 0.4 percent, its greatest increase in three years. Again, ostensibly positive data, reflecting some economic health despite the miasma of uncertainty. But the lingering threat of abrupt and massive austerity is still weighing on the markets, and participants can do nothing but brace for impact.

At the end of the third-quarter, American non-financial corporations held a record $1.74 trillion in cash and liquid assets. Companies are simply not spending, keeping cash stockpiles in the event of a new crisis. The economy is being carried by consumers at the moment, who bear an uncanny resemblance to overworked horses. But what’s going to happen in the first quarter, when holiday budgets are emptied and seasonal sales end, while the country faces stringent austerity measures that could kill job growth? In all likelihood, consumers are going to make like the corporations and stop spending.

If America falls off the cliff, sudden and severe austerity won’t be the only thing weighing on the economy. There will be a visceral human reaction from consumers and investors. Uncertainty and chaos always cause the markets to suffer.

Summing it up with elegance is Representative Charles Rangel (D-N.Y.): “Don’t make me lie to you,” he said, according to Bloomberg. “I have no idea what the hell is happening.”

Despite how difficult it is to remain optimistic, it seems like the best thing to do is avoid contributing to volatility and not to panic. With or without the cliff, competent participation in the market will be the only way to get it going again.

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