The fiscal cliff just got steeper
Obama's re-election portends a big fight over the national debt and lots of volatility in financial markets.
There's less uncertainty on the political landscape. But there's now more to worry about.
For a short while, Wall Street seemed to be fantasizing about a strong Republican showing in the 2012 elections, which would have brought single-party control to a notoriously fractious and dysfunctional government in Washington, D.C. That's one explanation for why the stock market had a banner day as voters were heading to the polls, rising by nearly 1 percent on a day when there was little tangible news to justify the gain.
But after a seemingly endless campaign and $6 billion worth of political spending, Americans voted to reelect President Obama, keep Congress more or less the way it's been, and continue the divided government that's been in place for the last two years. Many analysts considered that a worst-cast scenario in terms of resolving the "fiscal cliff," the huge set of tax hikes and spending cuts set to go into effect in 2013 if Washington doesn't come up with a better plan.
Since averting the cliff would require some kind of compromise between Democrats who control the White House and Senate, and Republicans who control the House of Representatives, a continuation of the status quo suggests that the same spiteful partisan squabbling that already dominates Washington will suffuse negotiations over cutting the deficit and starting to pay down the $16 trillion national debt.
"A status quo outcome will be viewed as a disappointment, and markets may sell off somewhat in the short run," wrote David Joy, chief market strategist for Ameriprise Financial, in a brief analysis of the election's consequences. "It will be viewed as an outcome which offers the prospect for continued partisan bickering on a budget deal, and which increases the likelihood of brinksmanship on the fiscal cliff."
Many analysts assumed that a Republican sweep, including control of both houses of Congress, would have raised the likelihood of a deal to rescind most or all of the tax increases scheduled to go into effect in 2013—which amount to about $545 billion. But Obama wants to raise taxes on the wealthy, which Republicans have said they won't tolerate.
That portends a nasty standoff similar to the meltdown that occurred when the U.S. borrowing limit needed to be raised in the summer of 2011, and bitter partisan wrangling went till the very last second. The borrowing limit did get raised, but the needless 11th-hour drama—plus the collapse of a broader deal to corral the mushrooming national debt—led to the first-ever downgrade in the U.S. credit rating. Over the next month, the stock market fell by seven percent.
So it's little wonder that Wall Street expects more of the same when an even bigger set of deadlines hits at the end of the year. "In a scenario in which the political makeup inside the beltway is largely unchanged from last summer, we expect an intense battle," investment bank UBS advised clients in a research note ahead of the election.
There are still plenty of ways that a divided Washington could steer clear of the cliff and spare the economy another unneeded shock. President Obama, who hasn't staked out a strong stance on deficit reduction, could grant House Republicans a few of their priorities—which mostly involve spending cuts—in order to reach a compromise. Chastened Republicans might show a stronger inclination to solve problems rather than scoring political points. Business leaders, who have been heavily lobbying for a solution, might finally bang some sense into the politicians.
But none of that will happen for a while, if it happens at all. In the meantime, brace for a few weeks that may be the bumpiest of the year so far. The election is over, but the fighting probably isn't.
More from U.S. News
To all the millions of victims of superstorm Sandy, Chris Matthews has a message: "I'm so glad."
The MSNBC host, on a panel of pro-Obama pundits including Rachel Maddow, ended election coverage overnight by saying he's "glad" the storm hit, suggesting
"I'm so glad we had that storm last week," Matthews said, after interjecting to give some final thoughts. Somebody off-screen could be heard saying "ooo" at that remark, but Matthews confidently put his hand up to explain.
"No, politically I should say -- not in terms of hurting people. The storm brought in possibilities for good politics," he said.
"Americans have now officially and permanently paved the way for the decline of the U.S. Greece, here we come"!
I assume you mean that reelecting Obama is the paving material that will cause the decline.
Does this mean that you blame him and the democrats for the current economic conidition?
How wrong is that. This decline started with Reagan and each administration since then, 3
Republican and 2 democrat, have each applied paving to the road of decline. Now we
are headed for the cliff and much of transporation from trip was provided by the Bush II
No the road to economic disaster his paved with the policies of both parties. Winter is
approaching and this will make the slope to the cliff a great deal more slippery.
EVERYONE SEEMS VERY ANGRY WHICH WILL NOT DO ANY OF US ANY GOOD.
SO STOP BEHAVING LIKE CHILDREN AND SUGGEST WHAT WE CAN DO TO HELP OUR COUNTRY. HOW ABOUT BETTER EDUCATING OUR YOUNG NOT TO HATE, STAND UP AGAINST THE LAZY NEXT DOOR OR THE BIGOTS YOU ACCEPT AS FRIENDS. FIND SOMETHING POSITIVE TO CONTRIBUTE TO.
I think I heard every veteran in Arlington Cemetary roll over in their graves last night. We are lost...
The American people just validated why we are viewed as a third world, second rate country. Why would American voters/citizens subject the country to this. I would say that there is a 47% chance (representing the amount of Americans that pay NO Federal Income Tax) of why this was done. In my opinion, if you do not pay federal income tax, you do not vote period!
This is a tragic day in American history. Our children's children will remember this day because they will be paying for all of the debt that our current "commander and chief" (what a joke) has racked up and has no idea of how to get out of other than wanting to tax the very people that create jobs in this country. Here is a novel idea, make the generational welfare collecting citizens of this country GET A JOB! Make the 47% of americans that PAY NOTHING in federal tax pay their fair share.
Gee, the prophets of doom are having a field day; relax, this is what Democracy is all about. If you wanted
Romney to win the election, you should have hit the pavement and work in his campaign. It is all over
but the shouting now. May God bless the United States of America!
With all the very apparent righty thumbs down to any and all lefty comments, makes me wonder were the he11 were you last night!!! I guess most of you just could not vote twice, eh?
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Breaking up big banks is an untested solution to the too big to fail problem that attempts to isolate and dismantle large, troubled institutions while protecting the rest of the economy.
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[BRIEFING.COM] The major averages ended the Wednesday session on a mixed note. The Nasdaq (+0.4%) and Russell 2000 (+0.3%) posted modest gains while the Dow Jones Industrial Average (-0.1%) finished in the red. For its part, the S&P 500 (+0.03%) settled just above its flat line.
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