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What's Next for the Fiscal Cliff?

By , Money Morning •

With both parties viewing the results of Tuesday's election as a mandate from the American people to address the major economic problems, Congress and the Obama administration will focus first on not having to cross the fiscal cliff.

Clearly, neither party wants the American economy to ever look anything like it did in 2008 and 2009. Towards this end, Congress has gone back into session to reach an agreement to move the economy forward.

Drawing a line, House Speaker John Boehner, R-OH, said Thursday that, "Raising tax rates is unacceptable. Frankly, it could not pass the House. I'm not even sure it could pass the Senate."

Democrats have taken upon the victory on Tuesday to urge a strong line be taken in budget negotiations.

Speaking today (Friday), President Obama kept his call for greater taxes on higher income earners.

"As I've said before, we can't just cut our way to prosperity," President Obama said Friday. "If we're serious about reducing the deficit we have to combine spending cuts with revenue. That means asking the wealthy to pay a little more in taxes."

Fiscal Cliff Effects on U.S. Economy

The Congressional Budget Office, a non-partisan research group, and most economists predict that the United States will fall back into a recession if nothing is done to stop the fiscal cliff.

The CBO research anticipates an increase in the unemployment rate to 9.1% if no agreement is reached.

While there would be a reduction in the deficit of over $500 billion from the spending cuts and tax increases, the economy will shrink by 0.5% and millions of Americans will lose their jobs, according to the study.

Most likely, there will be an interim resolution to the fiscal cliff, as Congress and this administration have reached on other budget matters. The White House and Congress are looking to reach an agreement quickly as the fiscal cliff is hardly the only major economic issue looming as the debt ceiling will have also to be raised from its current $16.4 trillion position.

As part of any bargain, Sen. Majority Leader Harry Reid, D-NV, is looking to raise taxes on "the richest of the rich."

But to indicate his willingness to work with the Republican-controlled House, Reid did state that, "I know how to fight. I know how to dance. I don't dance as well as I fight, but I'd much rather dance any time. It's better to dance than to fight."

No matter what footwork Reid uses, it is anticipated that there will be binding levels for spending cuts and tax increases as part of any deal. There is no way that will resolve the economic issue over the long term, but it is hoped that it will now placate the financial markets.

The day after Obama's re-election, the Dow Jones Industrial Average fell over 300 points with gold rising. If no agreement is reached before Jan. 2, 2013 and the fiscal cliff is crossed, the markets will slip even more.

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