Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

US: Merry Cliffmas‏

Published 12/23/2012, 03:23 AM
Updated 05/14/2017, 06:45 AM
Despite progress in negotiations, the US Congress has failed to pass legislation before Christmas that averts the substantial fiscal tightening about to hit the US economy on 1 January. The Congress has now left for Christmas holiday but will return on 27 December. This means that President Obama, House speaker Boehner and the Congress have four days after the Christmas holiday to strike a deal.

Thursday night Boehner dropped a House vote on his so-called Plan B, which included tax hikes for those earning more than USD 1m per year. According to Boehner, the vote was dropped as he was not able to get a majority within the Republican party to support the plan. Even though the bill was never going to pass the Senate in its current form, it is still a blow to the negotiations as it suggests that Boehner does not have the support from the rank-and-file members of the House.

There is still time to strike a comprehensive "mega-deal," which includes a solution to the immediate fiscal cliff issue for 2013, a framework for spending cuts over the coming decade and an increase of the debt ceiling about to be hit in February/March next year. However, a more likely scenario is that we will get a "mini-deal," which bridges the fiscal cliff but does not tackle the debt ceiling.

A "mini-deal" is likely to include an extension of the Bush tax cuts for the majority of the American households and indexing the AMT for inflation. It is also possible that it will include an extension of the emergency unemployment benefits, and a "doc-fix" but not an extension of the payrolls tax cut or changes to the Budget Control Act’s sequestration. Such a deal is likely to be drafted by the Senate Democratic majority and pass the House with unanimous votes from the Democrats and support from the part of the House Republicans that would like to avert tax hikes for all Americans.

It will ease the immediate fiscal blow to US households but will not raise the debt ceiling or include major spending cuts. Legislation on these issues is delayed until next year, when politicians will start a new round of negotiations ahead of the late February/early March deadline, when the debt ceiling becomes binding. Hence political uncertainty is set to remain high next year.

Finally, the likelihood of a temporary fall over the cliff has risen although we still see this as a less likely scenario than a deal bridging the cliff. Tax hikes for all Americans might be seen by Obama as the thing needed to get the House Republicans back on the negotiation track. Although we are likely to see a deal that will reverse many of these tax hikes and fiscal tightening early next year, even a temporary cliff dive will have serious negative consequences for financial market, household and business sentiment. It is also likely to trigger a downgrade of the US debt rating from Fitch.

To Read the Entire Report Please Click on the pdf File Below.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.