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.

By MSNMoney partner Nov 7, 2012 10:31AM

US NewsBy Rick Newman


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.


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660Comments
Nov 7, 2012 11:18AM
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In 2008 it was "we will fundamentally change America" - for those of you with your head up your you know what - this meant making us like Europe.  Executive privilege will be worn out the next 4 years and there will be no compromise from Barack Hussein Obama.  He has a mission and he will get his way by the end of 2016.

 

In 2016 - please do not blame Bush- I do not think he was a great President, but he does love this country-unlike Barack and Michelle Obama.

 

The pay you can keep to spend as you see fit and not how the government sees fit to spend will be significantly less over the next few years.  And health care - just wait for a rude awaking.

 

Go ahead and continue to be focused on reality TV, and other empty programs, that are there to distract you.  Also, continue to only listen to PMS MBC and other networks that spew out lies and hate.

 

God Bless America!!!  We are going to need all the prayers we can get!!!  

 

If you work for the government either as a military person or as a person representing our country on Soverign soil - do not expect to be protected by this man!

 

 

Nov 7, 2012 11:15AM
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After four years of preparing - and waiting - to start a new business related to the real estate and construction business, I've now had to make the unthinkable choice that it’s safer to apply for disability. After all, as Obama said - government needs to be a bigger part of our lives.

Nov 7, 2012 11:14AM
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LOL REPUBLICANS ARE SO SALTY 

SORE LOSERS

HAHAHAHHAHAHAHAHA
Nov 7, 2012 11:14AM
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So the American people have spoken and again we have a lame duck congress. It's a good thing Democracy doesn't have to make sense.
Nov 7, 2012 11:14AM
Nov 7, 2012 11:10AM
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The decline of America is now set in stone you don’t have to work to make your own prosperity the government will provide it for you. (Till the money runs out) U.S. debt is $53,400 for every man, woman, and child, compared to $39,400 for every man, woman, and child in Greece. We will now pass the point of no return, better learn to speak Chinese.  

Nov 7, 2012 11:09AM
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This is just my feelings. If you the news media would try and heal this country by demanding that everyone work together in Washington make Congress stand behind the people we voted now stop the BS.  The house needs to stop concerning themselves with there paycheck and worry about ours. The American people and the media must demand the change.
Nov 7, 2012 11:09AM
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Welp, here we go. Americas chickens are comeing home to roost
Nov 7, 2012 11:08AM
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for usa/no party.lets be fair dont like the 2 party system.but this fool did not cause it .bush did,banks ,wall street etc.did. not this fool.get it right.before you complain.kind of like .you call pot a drug.when its a herb.or like you go to church ask for forgiveness and walk out and start doing it again.when christ did not teach in a church.but the fields.so before you complain.know yor facts.we were going on the cliff before this fool came to office.but at lease he is the lesser of two evils.thks go usa.thks
Nov 7, 2012 11:03AM
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Republicans were running on HOPE. They were reminded that Hope is not a method. 
 
This election have prove that Republicans need to wake up soon before they become irrelevant. 
 
Now Wall street is runnnig on HOPE and trying to manipulate/vent their anger to see if they can get their way.  Hope wall street doesn't become irrelevant. Lets see who wins. 


 

 
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Nov 7, 2012 11:02AM
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It's obvious people voted to protect the hand outs and to uphold perversion of the society. Now there is no reason for the government to keep pumping up the everything by excessive printing. Let the corrections begin!!
Nov 7, 2012 11:01AM
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We can now kiss what this country was goodbye.

 

Nov 7, 2012 11:00AM
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Congress has always planned to go over the Cliff.  That's why they created it.  Why was it impossible to come up with a budget agreement but Congress was able to come together and create a Fiscal Cliff. It's because things have gotten to the point that they will have to pass some very unpopular legislation in order to fix anything.  Political suicide.  The automatic nature of the "Cliff" allows all the unpopular stuff to pass but every politician can stand up and say he didn't vote for it.  It's that simple. Ah...politics!

 

(I personally don't like the term "cliff".  It's more like a gradual decline that starts Jan 1.)  

 

 

Part 2 (Added around 3:00) It also will allow Congress to look like heroes when they come back later in 2013 and remove some of those provisions that were enacted automatically on Jan 1.  The cliff is a win-win for them. 

 

 

 

 

 

 

 

Nov 7, 2012 10:58AM
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Looks like 47 million on food stamps + Obama's allowing millions of illegal aliens + his skin color clinched his re-election. 

Its sad that 5.62 Trillion in debt in 46 months + 15 million more on food stamps + broken promises + 2 years without a budget and two budgets that got ZERO dem votes  would have told most voters this man can't lead.   

I guess tax returns , Big Bird , and more hollow promises was enough. 

I wished Obama in 2008 would have done a great job for this country and he fell short I sure hope he puts JOBS first unlike his first term. 

Well the Liberal west coast and blue dogs of the east  hold on tight because the next 4 years are ALL YOUR FAULT.

Nov 7, 2012 10:50AM
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Will this be the honeymoon or the hangover?

Nov 7, 2012 10:49AM
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Mr. President, might I suggest taking a page from the Republican playbook and no compromise, let sequestration happen. To beat a bully, you must become a bully.
Nov 7, 2012 10:48AM
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Americans have now officially and permanently paved the way for the decline of the U.S.   Greece, here we come!
Nov 7, 2012 10:47AM
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In other news unemployment jumped this morning when all the Republican blogers were fired. Good bye ya soon to be welfare bums.
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