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The Fiscal Cliff: So Bad it May Be Good


Picture this scene. It's a cold, wintry night. The roads are icy and full of curves and you're trying to get to the pharmacy before it closes but your tires are bald and one headlight is broken. If ever there was one, this is clearly a recipe for disaster.

Meanwhile, down in Washington, another disaster is brewing. Just like the vehicular variety outlined above, this one is also plain to see and easily avoidable. And yet, our nation's elected leaders look set to go for it and take the country's fragile economy over the fiscal cliff rather than taking the necessary action needed to avoid a certain crash.

The fact is, Congress has seen this slow moving, trillion dollar barge of tax increases and spending cuts coming for more than 14 months. After all, it was they who kicked the can here to begin with via legislation that was born out of the debt ceiling/downgrade debacle of 2011.

To be fair, we still have until January to do something about it before our financial future flips over to autopilot, and lots of very smart people think we will get something done - just in the nick of time - and the predicted recession will be avoided. Which would be nice, since the Congressional Budget Office has said a sudden hit to the economy, amounting to 5% of GDP, would trigger a significant recession plus the loss of 2 million jobs.

"My suspicion is it will happen in the next congress," says Dan North, chief economist with Euler Hermes in the attached video. "I don't think anything will happen in the lame duck session, but I do think the parties will come together because neither one wants to be seen as driving us over this cliff."

Barring an outright partisan sweep in the upcoming elections, I am of the mind that the showdown will simply resume where it left off the last time, with neither side willing to blink or stand down from their partisan positions, thus over the cliff we go.

But North thinks even if that happens and January 1st comes and goes without agreement, Congress will surely "override the sequestration cuts" and would retroactively back out of the tax increases too. While that might seem easy and painless, it would likely rile the markets, the ratings agencies and investors, and could lead to an increase in interest rates (that Fed Chairman Ben Bernanke has practically killed himself to keep low) and thus, take a bite out of nearly every American household's budget.

"What we really need is to come up with a credible long term plan to reduce the debt level," North says. "It's weighing on the economy and needs to be cleared up."

But to do so, would require that either a political compromise on taxes and spending be reached (often referred to as a Grand Bargain - even though it's the furthest thing from a bargain for taxpayers!) or a political landslide flows through the Capitol and sweeps gridlock out of the way with it.