No Christmas miracle for fiscal cliff

'Twas the day before Christmas and all through the House of Representatives, not a creature was stirring -- since House Speaker John Boehner told members to go home for the holidays last week without a deal on the fiscal cliff. Members of the Senate are also with their families, and President Barack Obama is in Hawaii for a vacation. The once unfathomable prospect of about $600 billion in tax hikes and government spending cuts coming into effect at the end of the year is becoming frighteningly real.

Not surprisingly, stocks were lower in Monday's holiday-shortened trading day. Declines will likely continue until a deal emerges. So much for the Santa Claus rally.

"There's a lot of uncertainty,"said Jacques Porta, who helps manage $627 million at Ofi Patrimoine in Paris, in an interview with Bloomberg News. "We’re at a political dead end. Everything has cooled off. The market has become cautious."

Make no mistake, everyone loses if the economy falls off the cliff. People with limited means are especially vulnerable. According to The Wall Street Journal, the overall tax burdens for households earning $10,000 to $20,000 would rise from an average of $68 to $605. The more well-to-do would feel the pinch as well.

Consumers are already cutting back on spending. A recent Bankrate survey found that a third of Americans are spending less because of worries about the fiscal cliff. So far, the worries have not been reflected in the economic data, according to Reuters, but it's still early days. Retailers are expecting holiday sales to be less robust than last year.

As the cliff grows closer, the caution could morph into panic.  Even if politicians come to their senses at 12:01 am January 1, the damage to the credibility of the the U.S. government will be lasting. Remember, it was Congress' plan to create the fiscal cliff so it would have little choice but to take action to avoid it.

Eventually, this problem will be solved. But then Congress will then have to take up the equally contentious issue of raising the debt ceiling. Unless the Treasury's ability to borrow is expanded, the government would be forced to close and its credit rating may face further downgrades. The debt ceiling was expanded as a matter of routine until recently. 

For investors, it looks like political turmoil will mean tough sledding into January.