Hurtling Over Fiscal Cliff Likely Regardless of Election Outcome

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Representatives of the Group of 20 (G20) industrialized countries meeting in Mexico City over the weekend begged U.S. officials attending the meeting to avoid the impending fiscal cliff in 2013.

Chile's finance minister, Felipe Larrain told Reuters, "If we're not able to resolve the cliff, that could be the tipping point for a much more complicated scenario in the world economy."

The G20 clearly recognizes the risk of the U.S. falling off of the fiscal cliff.

Comparing the relative risks of the U.S. and Europe, Canadian finance minister Jim Flaherty told Bloomberg Businessweek, "In the near-term, clearly the U.S. situation is the higher risk."

Tomorrow's presidential election may complicate the situation regardless of if U.S. President Barack Obama wins a second term or if Mitt Romney is our next president.

Washington insiders have suggested that, unless there is a wider than expected margin of victory for either candidate, legal challenges are likely, which could put the result of the election in doubt.

In fact, each side has hefty legal teams waiting to jump to action if the election is close.

Washington insiders believe that the most likely outcome is that President Obama will win re-election but that there will be at least a week of "funny business" as the Republicans challenge close electoral contests at the state and at the federal levels.

No one expects the election results to be in doubt for six weeks, as happened in 2000. But, even if challenges to the election last only one week, that is a week when nothing will be done to resolve the issue of the fiscal cliff. A tight race for the presidency followed by bitterly contested court challenges are not going to put politicians in much of a mood to negotiate, regardless of the outcome.

Analysts say there is only a 40% chance that sequestration can be avoided altogether. They think it is likely that we will run off of the fiscal cliff even if, like a cartoon character, we are left spinning our legs in midair for a moment before plummeting towards earth.

There is a view, both inside Washington and beyond the Beltway, that it will take the "pain of sequestration to bring both sides to the table."

By the same token, if there is no deal to avoid fiscal cliff 2013, negotiations will begin in earnest once we have gone over the edge. The current harsh sequestration plan will be modified through negotiation to make sure that the military is exempted from major cuts to its budget. But that means that households will bear the brunt of the pain through cuts in entitlements and higher taxes.

That could tip the economy back into recession.

Is there any hope for a deal?

That depends, in large part, upon the election. A clear margin of victory for either candidate would make it easier for Democrats and Republicans to hammer out some kind of a deal before year-end.

But, if the election ends up being contested in the courts, it will harden negotiating positions on both sides and take up precious time when there is no time to spare. Well-intentioned Republicans and Democrats may be unable to make a deal if they are not given enough slack by their embittered colleagues.

Even if a deal is possible, it will come only at the last minute – Dec. 23. The market will have to deal with an enormous amount of uncertainty between Election Day and Christmas Eve and uncertainty is usually not good for share prices.

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  1. Brian Haselum | November 7, 2012

    Guess what happens when you overspend on your credit card and you borrow more money to cover that debt and find you can't pay that debt then borrow more money at a higher interest rate, you end up bankrupt and I'm only talking of thousands of dollars not trillions !!! so question, when can the US pay it's debt and make a profit, never , because a third of your debt is borrowed money from overseas and you have not cut back spending , so on it goes just as a dog chases it's own tail, no where !!

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