30 December 2012

Why Avoiding the Fiscal Cliff Might Actually Hurt the Market (and the Economy)

The fiscal cliff agreement is likely to make the market fall.

The quality of the discussion in Washington will define the quality of the budget deal we get. As of now, it doesn't seem as though the quality is particularly high.

What could easily happen is that a deal gets through Washington that is good for the economy short term but is bad long term. That is to say, the cuts in spending and the hikes in taxes will be minimal, like cosmetics when it is cosmetic surgery that's needed instead. This is good short term because it means that a fragile economy is not hurt by a contraction in consumption. This is bad long term because it means that the deficit will remain unresolved.

If, by contrast, we get a real deal that phases in significant spending cuts and tax hikes, the market will surge. And eventually, so will hiring and salaries.

As of now, that dialogue doesn't seem to be happening. Instead, it is as if the two parties are speaking two different languages and so far, no one has stepped forward to translate.

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