"The explosive market rally following the fiscal cliff agreement was based more on what didn't happen than what did. What didn't happen was the implementation of automatic tax increases and spending cuts that would have shaved about 5% off GDP and cause a recession. What did happen was an agreement that would still reduce GDP by about 1.5%, an amount that still looms as significant in light of an economy that is only slogging along at a growth rate of about 2%. Even more important is the potential mess that lies ahead. The Treasury Department's extraordinary measures to extend the debt ceiling runs out at the end of February or the beginning of March. The sequester requiring automatic across-the-board spending cuts of $110 billion for 2013 goes into effect on March 1st. The federal government's spending authority for the current budget expires on March 27th.
The combination of the debt limit, the sequester and the government's spending authority, all expiring within a short period promises to make the turmoil over the August 2011 debt limit fight look like a day at the beach in comparison-----and that fight led to a U.S. credit downgrade and a near default on paying federal obligations on time. Already, the Republican congressional leadership has declared its intention of using the debt limit to press for significant spending cuts, even at the risk of another credit downgrade and the shutting down of the federal government. Senator Pat Toomey of Pennsylvania said "We Republicans need to be willing to tolerate a temporary partial government shutdown."
President Obama, on the other hand, has drawn a line in the sand, saying that he would not negotiate the debt limit and would not allow the issue to be continually used as a weapon to slash spending. He stated that Congress has already passed the legislation authorizing the spending and should not renege on paying the bills. As in August 2011, this could lead to another period of brinksmanship and uncertainty about the possibility of a U.S. default and credit downgrade combined with a government shutdown.
Going into the fiscal cliff negotiations, Obama had the upper hand as doing nothing would have triggered big automatic tax increases that Republicans abhorred. Now, with that out of the way, the Republican leadership feels that they have a lot more leverage in the upcoming round of negotiations. We therefore could be headed for an acute crisis that would dwarf anything we've seen in recent years.
Not much is likely to happen immediately ahead. The president's inauguration is on January 21st, with the State of the Union speech following in late January or early February and the budget presentation by February 4th. After that we expect things to heat up, although the stock market concern is likely to emerge long before.
The market exploded to the upside following the fiscal cliff settlement based on what didn't happen. However, the agreement was limited in scope and most of the hard work lies ahead. We are now facing a period of severe infighting between two opposing parties, both of which believe they have the leverage to get their way. We are likely facing a period of accusations, name-calling, acrimony, brinksmanship, uncertainty and threats to the credit standing of the U.S. Furthermore, any plan that does emerge from the controversy will necessarily include more spending cuts and tax increases and an even further hit to economic growth. In this atmosphere, we think the market rally will fade within days and that a major down move is probable."
After the new congress is sworn in, are the republicans still the majority?
Even so, I'm not so sure there will be a fight similar to 2011 debt limit debacle, because if they choose to fight, they'll be sending the US into possible default and will have started a global recession, and they'll be blamed for all the way into the next election.
IMO, they'll not chance either and will raise the debt ceiling w/ out issue. So why is it they're waiting until the last second to raise it, perhaps the brinkmanship will send investors back into the safety of bonds keeping our borrowing/refinancing costs low and the Fed's B/S intact.
Just the other side of the debate... I, probably, could debate your case/side just as well.
BTW, I liked your post , it was well thought-out and written.