The U.S. Senate will meet today in hopes of putting together some sort of deal to keep the country from going over the so-called fiscal cliff at midnight tonight. At least that's going to be the narrative out of Washington D.C. today as traders clean up their books on the last trading day of the year.
The basics of the "fiscal cliff" have been covered. In a nutshell, there is no real cliff. We are about to start a series of tax hikes and spending cuts that will extend over the coming weeks and months. There is less drama than meets the eye today. Even if a last second agreement is announced, it won't be anywhere near comprehensive enough to staunch the bleeding from wounds Washington is inflicting on the economy.
The rhetoric surrounding whether a person earning $250,000 is "rich" and if that means they should be paying higher taxes largely misses the point. The economy won't grind to a halt because people earning quarter of a million dollars have to kick in more to the IRS. The fight over raising taxes on the majority of Americans is a distraction. If a deal is struck today, it will likely revolve around the bifurcation of who has their taxes automatically hiked and it won't mean a thing.
To the extent there is a some event horizon point at which the economy can't be saved from lurching to a halt, we've already reached it. Corporations have stopped or slowed spending. Consumer confidence has already been dented. We've entered the economic black hole created by Washington D.C.'s failure to do its job. The only question is, "what happens now?"
The depressing state of our elected officialdom aside, the odds still favor the economic cycle saving us from ourselves. American manufacturing jobs are being created, home prices are rising and stocks have quietly posted four straight years of gains.
Ironically, if D.C. could get out of the way, politicians could be fighting over credit for the economy rather than killing it in the crib. The battle for the heart of markets in 2013 isn't between Democrats and Republicans. The real fight pits an improving economy against a lack of fiscal sanity. Can a sluggish economic recovery be restarted after bipartisan idiocy brings it to a halt? If the answer is yes, the smart money favors a decent year for markets in 2013. If the uncertainty continues and the spending spigots stay dry, the ensuing recession will be Washington's fault.
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- Budget, Tax & Economy