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 2:23PM
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There are a few differences today than yesterday.  Firstly there will be no housing recovery. Secondly there will be no jobs recovery.  The New World Order is based on the premise America has done too well as compared to the rest of the world.  This now stepping down of the the American lifestyle that the POTUS gave himself as well as every American into what will now only accelerate.  The Internationals need compliance with wage rates across borders and America needs manufacturing wages close to $3 USD per hour.  You will need more Illegals, more unemployment,  as well as more inflation here at home to accomodate this goal. I don't really think Romney would have made any difference at this point.  I was only being hopefull but not realistic.  You need to understand the big global picture to invest wisely.  Small business in America is crippled.  These small guys come up with a good product or idea it is either soon made in China at a price not competitive here or Illegals are hired here to build it at wages American Lifestyle labor cannot match.  I was speaking to someone this weekend who was unable to understand how you lower Americans lifestyle when you allow products made in Countries where labor is held down below our rates and where illegal workers are allowed to freely enter our labor pool which drives down wages here at home.  I think most of those who voted in yesterdays election must also not understand the situation they have now voted all of us into.  This Market will now return to somewhere between 6,000 to 6,500 in my opinion. 

Nov 7, 2012 2:22PM
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wow.  these are some of the dumbest, lamest, and incorrect comments ever.  There is no question that if we tip over the fiscal cliff we will go into recession - not a big one, but a recession.  But economies recover....and it really doesn't matter who is sitting in the White House - in the next 3 years this economy will have recovered (and then politicians can start taking credit for the recovery).

 

It's like trickle down....doesn't work - never has, never will.  Job creators create jobs - no matter what their tax rate is (I employed 350 workers....if I needed more I hired more....what my tax rate was made no difference - if new workers would net me more money they were hired.  period).

 

Keep a bunch of cash available - cash is great in a recession.  Don't pay too much attention to the Beltway - middle class taxes will come down and the 1%ers tax rate will go up a bit.  You may have to buy a Cadillac instead of a Mercedes....but in a few years all of this will be over.

Nov 7, 2012 2:15PM
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Come on!  Tell us how we can help you "pundits"...you cannot "churn" the markets much more with reporting this is all correct.  You have no "base" or basis points...yeah, know this.  Who are you going to rape next....what is left.  ?
Nov 7, 2012 2:13PM
Nov 7, 2012 2:12PM
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Democrat voters are mostly single white women and minorities, people who benefit from welfare, food stamps and other free government handouts. Republican voters are mostly white males and married white females, people who work hard, spend responsibility, and have more money the government can tax. So the Democratic agenda has always been to tax the successful worker and give it to their base to buy their votes. They outnumber us.
Nov 7, 2012 2:12PM
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Indeed it is a sad day for our democracy.  It really went on life support in Nov. 2008 but became critical and comatose yesterday.  Its all downhill from this point and there is no return to government as we knew it.  Fiscal responsibility is no more and a debt driven economy is the new wave, until the currency undergoes complete failure which is now cast in stone.  Guard your wealth and assets carefully, in 2013 additional reporting requirements begin and the regulatory environment increases as well.  Get out of cash as quickly as possible, dump the dollar, it will be debased.
Nov 7, 2012 2:11PM
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Just goes to show 50% of American people are stupid. If your at least going to keep the same President you better have a congress and senate of same party so at least something will be done right or wrong.The American people are half idiots.
Nov 7, 2012 2:09PM
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lets see it would have been a positive if romney had declared china a monetary manipulator as he promised to do on his first day if elected? a trade war would have been a positive? get a grip! 
Nov 7, 2012 2:09PM
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These are all very interesting views. I enjoyed them all. Frankly Im not sure if either party had a plan that would have been the answer. Guess we all will just have to wait and see what happens next. Me.. Im stocking up on lots of Non perishable food and seeds. Oh yea.. And dont forget the Ammo...  For hunting of course...  It was interesting to see how this election unfolded. The densely populated areas were Obamma's supporters. the Rural areas all Voted for Romney.. Why is that?  I hope you all know how to survive old school. It never hurts to learn how. Good survival skills trump a depleted 401K every time. Good Day Yall..
Nov 7, 2012 2:07PM
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The impending American fiscal crisis will make the Greek debt problem look like a 50 dollar payday loan. 
Nov 7, 2012 2:07PM
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Ahhh.... The sky is falling. In the next (4) years the newly re-elected president is going to by-pass a Republican House, get past the Senate, re-write the constitution and turn this country into a communist state. Cause that can actually happen.......

 

Ahhh.... we are all soo doomed. The economy will creep along at 1 - 2% growth a year, and thats not fast enough for us, cause we get McDonalds fast food in 3 min. Why can't the worst finacial crisis in 80+ years be fixed in a couple years? Thats not to much to ask.......

 

Oh NOOOO!!! With a Republican controlled house the president will be able to just keep borrowing trilliions with out the house even knowing it, and will just allow it..... And the newly re-elected president will just be able to pass a budget, no questions asked or without input, that allows us to keep borrowing money!... Ahhhhhhh So many things that are the presidents fault...

 

Ahhh.... the sky is falling! America should just kill itself.

Nov 7, 2012 2:06PM
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They say the American voice has been heard; I wonder how that voice ever spoke with all the heads buried in the sand. Called my sister in NY to remind her to vote; she commented "I don't like Romney; he's going to keep the poor, poor". I asked her to repeat that, and then said "Another words they are still, and have been poor the last 4 yearsr".  Listen, lets just give the Libs their vision on how higher taxes will solve everything; raise everyones taxes by 10%, that means tacking on a 10% bill to those that pay nothing.   And women, if he's for equal pay; why is he promising to not raise taxes on single earners making 200K, but only marking that figure up another 50K for dual earners; are womens tax break only worth another 50K (yes, it's a little stretch on this thought, and also assumes the male is the primary earner). My daughter just quit her job and took another; a big part of the reason: Although she was the top person in her department, everyone got the same "Gold Star" (same pay raise) no matter ones performance. She worked for a for profit college and Gov't regulations mandated those pay raise structues

Nov 7, 2012 2:05PM
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There is just no limit to the ignorance of the American Voter.  It's amazing how so many people can be fooled for so long.  Well, nice going, you Moronic obama fans, you just sealed the country's fate.  Since he doesn't need to worry about re-election, that Solcialist Bastard has free rein.

 

Nice going, Calif, Ohio, Penn, Illinois, etc.  I suggest all you morons learn to speek Greek because we will be following in their footsteps.

Nov 7, 2012 2:04PM
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Guess what. The sky is not falling and the world is not coming to an end. Everyone needs to get over themselves and realize the United States was here long before any of you and will be long after you quit yelling from your graves. I have travelled to China, India, Europe, and Japan and there is no place greater or a better place to live than here. Everyone just has to grow up and learn to play together instead of running to their own corner with the ball when they can't get everything they want. For the 5% of sensible contributors to this nonsense i wish you well and good luck. I am going to follow Murphy's law and quit trying to teach Pigs to sing. It wastes your time and just annoys the pigs.
Nov 7, 2012 2:04PM
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What the American people voted for was a return to sanity for the United States.   The responsible Republicans, if there are any left, can now come to the table and they will find that their ideas are welcome and will be considered.  Let's not forget that the single greatest preoccupation of this last Republican Congress has been restricting and limiting the rights of women to control of their own bodies.  Whether or not you acknowledge it, this is an economic issue for most women and families.  The ultra-conservative congressional districts continue to send their crackpot representatives to Congress, but in state-wide Senate elections and the national election, voters said "No thanks" to that.  Man up. 
Nov 7, 2012 2:03PM
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I've never heard so many whiny crying babies in all my life. .. yeah doomsday, good grief ! Go home, crawl in your closet and have yourself a big cryfest and pity party. The president we reelected for one reason and one reason only - he's qualified to the do the job. So let him do it and take some pride and integrity and go out there and make a life for yourself. or better yet crawl into a shelter with a years worth of food and seal the door - we won't miss you!!!
Nov 7, 2012 2:02PM
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All hail Emperor Obama!  Instead of 4 more years in the White House, he should be given time in the Big House.
Nov 7, 2012 1:59PM
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I believe we are seeing the end of america and all it's glory. We as americans should get our guns and take the county back from tyranny and oppression, this administration!!!!! will imposed on us... all i can say is bye america
Nov 7, 2012 1:58PM
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Go ahead...you know what is happening you cons.  You have a welfare nation, now.  You can delete me as much as want to.  We know thiis crap will not work.  You have a socialist in office and you have contributed to making the divide deeper.  When will all "checks" stop for the "entitled".  It is coming.
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