There's nothing like an election to bring out the worst in our politics. Especially one in the midst of a terrible balance-sheet morass. People are desperate. They're angry. And they're realizing the politicos in Washington just don't get it.

Witness the recent backlash and Republican foaming at the mouth over President Barack Obama's comment on Friday that the private sector, which has created 4.3 million jobs over the past 27 months, was "doing fine" (compared with the public sector, which has lost more than 1 million jobs).

Behind the perceived insensitivity, Obama had a valid point. Government workers are being purged, adding to the unemployment rolls. Yet it seems this is what people want.

You can feel the tide turning as those stung by the globalized economy (manufacturing workers, for example) turn on their brothers and sisters in the tax-fueled economy that is the government payroll. Voters are saying, "How dare they get raises and a good retirement!" instead of asking why the rest of us don't.

Wisconsin's union-busting governor, Scott Walker, made headlines last week by winning his closely watched recall election. Voters supported his actions to cut public worker benefits and collective-bargaining rights. Similar efforts are under way in California; both San Diego and San Jose voted to tighten pay and benefits for public workers.

But this is a scorched-earth approach, focusing on what we can take away from others instead of how to make things better for everyone. We're talking reallocation of resources, not fresh growth or new jobs. Republican presidential hopeful Mitt Romney illustrated this view with his own gaffe, complaining that Obama wants "more firemen, more policemen and more teachers."

Image: Anthony Mirhaydari

Anthony Mirhaydari

In other words, we're inviting our political leaders to rain fire on yet another sector of the already bloodied middle class. The war has already begun, and the middle class is losing. It's about to get much worse as Washington pushes us off a fiscal cliff.

Down, and nearly out

First, consider our current predicament. Here's a list of middle-class miseries that comes courtesy of Gluskin Sheff economist David Rosenberg, who compiled most of it. I added a few items:

  • Forty-five million Americans (one in seven) are on food stamps.
  • One in seven is unemployed or underemployed.
  • The percentage of those out of work defined as long-term unemployed is the highest (42%) since the Great Depression.
  • Fifty-four percent of college graduates younger than 25 are unemployed or underemployed.
  • Forty-seven percent of Americans receive some form of government assistance.
  • Employment-to-population ratio for 25- to 54-year-olds is now 75.7%, lower than when the recession "ended" in June 2009.
  • There are 7.7 million fewer full-time workers now than before the recession, and 3.3 million more part-time workers.
  • Eight million people have left the labor force since the recession "ended" -- adding those back in would put the unemployment rate at 12% instead of 8.2%.
  • The number of unemployed looking for work for at least 27 weeks jumped 310,000 in May, the sharpest increase in a year.
  • Just 14% of high-school graduates believe they will have a more successful financial future than their parents.
  • The male unemployment rate for ages 16 to 19 is 27%; for ages 20 to 24, it is 13%.
  • Because of structural problems such as negative home equity (which keeps people from moving for work) and skills erosion (from long-term unemployment), UBS economists estimate that the economy's natural unemployment rate has increased from 5.7% before the recession to 8.6% now. This acts as a speed limit on potential economic growth.
  • Between 2007 and 2010, median family net worth fell nearly 40%, while median inflation-adjusted incomes before taxes fell nearly 8%.

Ugly stuff. And it's about to get a lot worse.

Voting for recession

I wrote in this April column that the country is facing a looming fiscal cliff, and you've certainly heard the phrase since.

Approaching is a collection of tax increases and spending cuts worth, according to Bank of America Merrill Lynch, $720 billion, or roughly 4.6% of the U.S. gross domestic product, if you include things like tax increases to fund the new health-care bill. They include the expiration of the Bush tax cuts, automatic spending cuts agreed to in the last budget deal, and more.

The math is simple: If these things happen, they will slash nearly 5% off the growth rate of an economy expanding at a pitiful 1.9%. And they're all set to happen as the calendar flips to 2013 -- unless Washington does something.

Also in the mix is a debt-ceiling increase, which is needed to avoid a government shutdown unless -- again -- Washington acts. I'm not holding my breath.

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You don't need a Ph.D. in economics to know that pulling that much out of a weak economy is a terrible idea. By one of the broadest measures, unemployment is still near 15%. The battered housing market, one of the keys to middle-class wealth in this country, is still trying to bottom. We're looking at an economic disaster on the scale of the 1937 double dip, and the middle class will bear the brunt of it.

Even Romney knows we're headed for fiscal suicide. He said as much in an interview with Time magazine when asked if he would countenance budget cuts of this size in his first year in office. He said he wouldn't, because "if you take a trillion dollars, for instance, out of the first year of the federal budget, that would shrink GDP over 5%. That is by definition throwing us into recession or depression. So I'm not going to do that, of course."

Of course not, Mitt.

The Congressional Budget Office agrees, noting that stepping off the fiscal cliff would slash 2 million jobs and tip the economy back into recession. We've never seen the likes of this sort of austerity. A 3.3% tightening in 1969 resulted in the 1970 recession. A tightening of 2% between 1987 and 1989 resulted in the 1990 stagnation. And a 2.4% tightening from 2005 to 2007 preceded the Great Recession.

To put this in perspective, America's fiscal cliff is about half the fiscal tightening Greece went through in 2010 (that country is in its fifth year of recession). It's about what Iceland experienced in 2010 and what Ireland endured between 2009 and 2011. Philippa Dunne of the Liscio Report notes that all three countries saw cumulative declines of more than 10% in GDP as a result. Yes, there were other issues (mainly banking woes) in play. But the austerity measures didn't help.

No compromise

Can we avoid the cliff? Yes, but bitter divisions in Washington make it very unlikely. Efforts to find a balanced bipartisan solution to the debt/deficit problem -- driven mainly by a weak economy and underfunding in Medicare, where funds contributed haven't kept up with increasing costs -- have failed badly.

The Simpson-Bowles commission was ignored. The congressional "supercommittee" got nowhere. And Republican House Budget Committee chair Paul Ryan's "Roadmap," which would essentially kill Medicare (an unfunded liability worth $52 trillion, according to his estimates, or nearly $460,000 per household) and turn it into a voucher program for seniors to buy their own insurance, was passed by the Republican House but has gone nowhere since.

Years of kicking the can down the road have brought us to this. Faced with the end of the Bush tax cuts, Washington punted. Faced with expiring payroll tax cuts and extended unemployment benefits, it punted again.

If anything, we're going backward now. Some in Congress have been trying to reverse the automatic spending cuts that were supposed to kick in if the supercommittee failed.

Faced with a potential fiscal drag of unprecedented size, we need our elected officials to compromise on deeply held positions to take unpopular stances. You know, putting country before party or self. Excuse me for not being optimistic.

Solutions, anyone?

Yet nobody's talking solutions. Nobody's talking about ways to address the fundamental drivers of this malaise. Obama hasn't done enough, and Republicans want to do even less. Fur flies all around.

In fact, according to a study by a team at the University of Georgia and New York University that looks back to 1879, the House has moved to the right to a degree never seen before. The Senate has moved to the left to a degree not seen since the late 1800s. Negative campaigning is on the rise, too, with Wesleyan Media Project finding that 70% of presidential TV ads are this way; that's up from 9% in 2008.

So, what now?

Unfortunately, the November election isn't likely to break the stalemate. Elections markets suggest close to a 70% chance of a split government -- with Republicans likely to keep the House and take the Senate, and Obama likely to keep the White House. Moreover, the fiscal cliff would have to be addressed by a lame-duck session of the current government after the election. Any postponement or can-kicking will likely result in another credit-rating downgrade for the U.S. -- like the one that rattled global credit markets last year.

Merrill Lynch analysts are predicting a deal to limit the fiscal cliff to 2% of GDP, reached through a series of partial postponements as the process is dragged out so that both parties can score political points. Markets won't be happy amid the chaos.

The analysts expect the payroll tax cut and extended unemployment benefits to expire, part of the spending cuts called for under the debt-ceiling agreement, among other things. It's the stuff that will hurt the middle class the most.

A true solution will likely prove elusive until the toxic climate in Washington changes. Members of both parties worked under Presidents Ronald Reagan, George H.W. Bush and Bill Clinton to turn from a deficit of 6% of GDP into a 2.4% surplus. Two bipartisan commissions actually accomplished unpopular but necessary reforms. In 1983, before his years as Federal Reserve chief, Alan Greenspan helped secure Social Security by increasing taxes and cutting spending via raising retirement ages. A military base closure panel helped slash Pentagon spending over the objections of local communities.

In the meantime, as 2012 draws to a close, a cloud of uncertainty will likely reduce confidence and economic growth -- even before the real austerity starts. Markets have yet to start paying attention to this issue, with U.S. Treasury bonds soaring on concerns over Europe. So, investors can expect turbulence later this year -- then hang on for 2013 and a plunge over the fiscal cliff.

Bet on help from the Fed

As bleak as the big picture looks, help may be coming for investors.

Société Générale's U.S. economist Aneta Markowska believes the Federal Reserve will act, via another round of monetary stimulus, to bolster the U.S. economy before these drags kick in.

With the $400 billion "Operation Twist" initiative that started last September coming to an end this month, the Fed's policy meeting next week will likely result in discussion something along these lines:

"Operation Twist was intended to reduce long-term interest rates by reallocating the Fed's bond holdings from short-term to long-term bonds. Simply extending the program isn't an option, because the Fed now holds less than $175 billion worth of short-term Treasury bonds."

Instead, Markowska is looking for the Fed to keep buying long-term bonds (and possibly mortgage securities), funding the purchases by soaking up short-term deposits from the big banks.

This, in the lingo of Wall Street, is "sterilization."

The announcement of a "sterilized Twist" will likely boost stocks and other risk assets over the next few months. In my recent columns and blog posts, I've recommended precious metals via exchange-trade vehicles such as the SPDR Gold Shares (GLD) and Market Vectors Gold Miners (GDX) funds, which should do very well, as the Fed's actions likely weaken the dollar and bolster silver and gold. For the risk-takers, individual issues such as Great Basin Gold (GBG) and Agnico-Eagle Mines (AEM) look attractive. I've added both to my Edge Letter Sample Portfolio.

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But as Election Day approaches and the fiscal cliff looms, investors should hunker down. I have no doubt Washington will sucker-punch good, hardworking Americans right in the gut just as they're getting off the mat. Maybe one day we'll punch back instead of hitting each other.

At the time of publication, Anthony Mirhaydari did not own or control shares of any company or fund mentioned in this column.

Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.