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Will we go over the fiscal cliff?
You no doubt have heard about the impending financial crisis. Some news programs are actually showing a ticking clock with a countdown in days, hours and minutes until the end of the year.
So what should we make of all this and what will happen? Progress on the negotiations between the Republicans and the Democrats does not seem to be going well and the deadline is looming. In the absence of some kind of agreement, on Jan. 1 tax rates go back to 2001 levels, defense budget cuts automatically kick in and at least a $600 billion reduction in economic activity will take place in 2013. For an economy that is barely limping along anyway, that almost certainly means recession in 2013.
The apparent lack of progress in the fiscal cliff talks is being described as a farce and a disgrace by some; by others, it’s a poker game where participants are simply not exposing their cards in the early stage of the game.
It’s most definitely not a poker game, a situation where one winner takes it all and the other side loses it all. Neither side in the fiscal cliff talks will feel like the only winner or only loser when a deal is finally hammered out.
Nor is it a hopeless farce being played out by fools who don’t know what they’re doing. There is no group more highly trained and experienced in the art of negotiating than politicians. Legislation can only be passed or amended through negotiations and compromises that result in enough votes from both sides.
The foolish part is that it has taken them so long to address the situation, leaving them so little time to get through the process. The risk is they don’t have time for the normal process and go past the end–of-year deadline, or that one side becomes more desperate for a deal than the other and at the last minute grabs prematurely at the last offer.
A good business deal hammered out in negotiations is considered to be one that does not have a winner and a loser, but one that is fair and acceptable to both sides. And that is certainly what is needed from the fiscal cliff negotiations if both sides are expected to work more closely together for the good of the country for the next few years.
Unfortunately, political leaders have become so hostage to the extremes of their parties that they won’t risk compromise for fear of the consequences. It’s time for them to become statesmen and do what’s best for the country and not the party. I think that although it appears hopeless, behind the scenes a compromise is developing.
So will we go over the cliff? I don’t think so. I’d like to believe that even Congress isn’t foolish enough to let that happen. In addition, the market is telling us it won’t happen. Recent conversations have produced the worst case scenario from the “Fiscal Cliff” front lines — an ultimatum from Treasury Secretary Tim Geithner, followed by finger pointing from both parties blaming the other for the impending economic disaster. News like that would normally send the market down 600 points or so. What did we get? A boring 60 point drop instead.
When a market fails to go down on bad news, something is going on. It leads me to think a deal is brewing. Have you noticed that each violence-threatening comment from politicians in Washington is generating market dips of diminishing magnitude? Nobody in the investment community believes that the problem will not get resolved. It is being greatly exaggerated by the media, which is now suffering from withdrawal from the circus that had us all glued to our TV screens during the presidential election.
I don’t know more than anyone else, but my guess is that at the very last minute, late December, they announce a compromise agreement claiming that they saved the economy and they’ll be all smiles and handshakes. It will actually be fairly minor and do nothing to solve the long-term problems. Those will just be postponed again. But the market will love it and spike to the upside because it means the party is back on — for now. By April we’ll be back to talking about the debt ceiling and Europe again. Then we get to repeat the anxiety all over again. We’ll find out soon.
Someday Congress will have to set politics aside and finally deal with the problem. But that day is not likely now. It will finally happen when there is no other choice. In the meantime, buckle up for a wild ride.
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Nick Massey is a financial columnist for The Edmond (Okla.) Sun. Contact him at www.nickmassey.com.
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