Cue Fiscal Cliff

Category : Blog on November 8, 2012

The initial weeks for President Obamas new term will increasingly focus on finding a compromise in Congress to overcome the “fiscal cliff” which looms ever nearer as we progress towards the year end. Gridlock in Congress over this matter is likely, and a solution is not inevitable.

If we peer over the fiscal cliff what do we see? A slump in GDP, a dip in consumer confidence, and a significant stall in the employment recovery. As Wall Street extends losses today on concerns around these fiscal woes we can only expect skittish conditions ahead for risky assets. The magnitude may depend on other news coming out of Europe and Asia, but there is certainly room for a confluence of events type sell-off. In addition, a drop back into recession is not out of the question.

CEOs don’t like this uncertainty either, and they will be more reluctant to make incremental hiring or new investments without greater clarity regarding the likely economic conditions for the year ahead. Without this clarity companies are going to sit on their cash and further hamper efforts to stimulate growth.

Can Obama find a solution which Congress can agree on? He struggled with this issue in 2011 where no compromise could be found on the debt ceiling issue until the eleventh hour. Will a similar path be followed with the “fiscal cliff” problem? A lame duck congress is not renowned for getting things done, but acknowledgement that a compromise will be found and implemented in early 2013 would be enough for markets to take comfort.

After all, who are the guys in Congress that want to go down in history as not being able to reach an agreement and sending the US economy [back] into the abyss?

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