The US Fiscal 'Moment': Cliff, Slope, Or Wile E. Coyote?

Tyler Durden's picture

The overhwelming majority of investors seem to believe that some compromise will be reached to resolve the looming fiscal drag, and as we noted here, this fact is more than priced into markets. As Barclays notes however, a big deal that encompasses entitlement and tax reform is very unlikely before year-end. Hence, if the ‘cliff’ is avoided, it will be because Congress extends all expiring provisions for some time while it works on a bigger deal. Such an 'extension/compromise' move would not reduce investor uncertainty if it were only for a few months; bond markets would simply start counting down to the new date. More importantly, the discussion about the fiscal cliff misses a broader point: the US will probably have significant fiscal tightening over the next decade that is a drag on medium-term growth. Yet more investors dismiss last year's reaction to the debt-ceiling debate - a 17% decline in 2 weeks - as any kind of precedent, claiming (falsely) that this was more due to European financial difficulties. We expect fiscal issues to be the defining drivers of the next several quarters and as BofAML notes, Washington's view of this 'process' as a 'slope' combined with the dangerously negative election campaign (which will need a 180-degree reversal for any compromise) means the likelihood of a Wile E. Coyote Moment is considerably higher than most expect.

The S&P 500 plunged by 17% between July 25th and August 8th and between the fiscal cliff, the debt ceiling, and the election - uncertainty remains high...


but this was not about Europe (as many prefer to believe) as this chart from Goldman shows

"...positive developments by the ECB narrowed the spread between Spanish and German ten-year bond yields by roughly 100bp (from 380 bp to 290 bp) while S&P 500 fell by 11% during those days, including nearly 7% the day after S&P lowered the US credit rating."




and what of compromise or small adjustments?

Via BofAML's Ethan Harris: A Wile E. Coyote moment

One of the best known moments in US cartoon history is when Wile E. Coyote accidentally runs off a cliff. Initially he remains suspended in air – and for a moment starts to believe he will be okay – but then plunges to the canyon floor.

Some in Washington are now contemplating a Wile E. Coyote moment around the fiscal cliff. In their view, the cliff is a fiscal “slope”, or “hill.” They say, going over the cliff initially has very little impact on the economy. The IRS could decide not to change tax withholding tables. The Alternative Minimum Tax doesn’t need to be paid immediately. Government agencies could spend down their cash balances. Households could draw down their savings. And even if policy does tighten, the fiscal cliff cuts spending and raises taxes by only about $2 billion per day and people will “know” politicians are bluffing. So what’s the harm?

In our view, this is a very dangerous way to look at the cliff. After a highly negative election campaign, both parties will need to do a painful 180-degree turn and negotiate a series of compromises. If politicians believe going over the cliff has no real consequences, then they will have little incentive to negotiate as the cliff approaches. Moreover, if the laws of gravity are suspended for weeks or months, why not keep debating after going over the cliff? In our view the end game – the ultimate game of brinkmanship – is a plunge in confidence and markets, and significant damage to the economy. We also believe the Wile E. Coyote moment won’t last long; by the time we go over the cliff, the dysfunctional debate in Washington will have already softened up the markets and the economy.

This reminds us of Summer 2011

A popular view last summer was that a temporary suspension of 25% of government outlays or a few missed Treasury debt payments was a reasonable price to pay to get a sensible deficit reduction plan. That didn’t work out so well. Despite a last minute deal, this brinkmanship contributed to a weak stock market, a downgrade of the US credit and then a large 6.66% one-day plunge in the market. In the end, the “sensible deficit reduction plan” that emerged was to add $110bn in across-the-board spending cuts to the fiscal cliff.

We can only wonder what would have happened to the markets and economy last summer if they had not reached a last-minute deal. Unfortunately, there is a growing risk that we could complete that experiment in January. Keep in mind that the stakes are much bigger this time. Last summer they had only the debt ceiling to deal with. This time there is the debt ceiling, the Alternative Minimum Tax ($120bn), tax extenders ($20bn), the Medicare doc fix ($20bn), the payroll tax cut ($120bn), extended unemployment benefits ($40bn), the sequester ($110bn), the Bush tax cuts ($180bn), Obama Care taxes ($20bn) and a number of other expiring programs ($90bn). Two billion dollars per day may not sound like much, but it is more than 4.5% of daily GDP.

Negotiations should occur before the cliff

Some of the arguments for going over the cliff are well intended: we do not want to rush into a bad deal. However, if the US is to avoid a major shock to the economy and markets, we think such negotiations should occur before the cliff arrives or after extending the cliff. The process matters as much as the outcome.


Using the cliff as a motivating mechanism would be a major mistake, in our view.

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SGS's picture


Tijuana Donkey Show's picture

Nope, he's just a puppet. Someone else behind him tells him what to do. cough - feed banks - cough

markmotive's picture

Remember the last time there was a budget issue? US ended up getting downgraded and markets tanked. And many politicos would have you believe that was a 'bipartisan success', right?


Stock Tips Investment's picture

Solving the deficit problem in the U.S. economy will bring negative consequences. Now or later. Pretender correct this serious problem, assuming no cost, is just an illusion. The more we delay we face, the greater the consequences. But deep down, our biggest problem is that we are leaving this responsibility in the hands of the government. The government originated the probleam, that solves it. That did not happen. We regresasr our origins. Private enterprise and individual initiative must regain control of our economy. A government smaller and more efficient. A larger private sector and dynamic. More freedom in business, fewer regulations and less political decisions. Government spending should not be the engine of our economy.

fockewulf190's picture

There is no painless way out of this disaster, and the longer this insane spending goes on, the more painful it is going to be. How many times have I read that statement in one form or another over the past decade.

Everybody knows the debt levels and the uncovered liabilities will be coming home to roost. Everyone knows the longer the ponzi runs, the more destruction it is going to cause. Everyone knows we are buring both ends of the candle with blowtorches.

Future generations of humans, not just Americans, are going to inherit the biggest pile of festering economic shit ever known to man. We are truly heading towards mass deevolution, the seeds of which have long since germinated.

Those being born today will be the cannon fodder of the 21st Century; just like those who were born twenty or so years before the First and Second World Wars. The generations of the damned.

Radical Marijuana's picture

The tunnels of deceit that control these things are practically infinite. There are many, many onion-like layers to ways of controlling civilization through lies, backed by violence. Just as the publicly perceivable layers exist, there must be at least an equal number secret layers, which are hidden. The important questions are whether, or when, those who secretly or covertly control the public, or overt government of the USA, decide that they think it is time to do something, for their own secret reasons. The government of the USA is obviously a puppet show. The magnitude of how bad that IS got displayed by the facts that the American money supply was privatized, and that system has been centrally controlled for a Century, with accumulating consequences. That the American government is a puppet show was even more horribly demonstrated by the events on 9/11/2001 being a successful false flag attack, which deliberately destroyed symbols of the American financial system. GIVEN THOSE FACTS that the American system is already so far gone into being secretly controlled, that a Century ago its money supply was privatized, and a decade ago some shadow government system was able to mass murder Americans, and not only get away with that, but also use that to advance their global agenda, THEN, the issue of the puppet show politicians making decisions is laughable, if you have a sufficiently macabre sense of humour.

Therefore, while there may well be public reasons to believe the likelihood of a Wile E. Coyote Moment is considerably higher than most expect ...  it remains relevant, although wild speculation, to try to guess at what the secret shadow government of the USA wants to do, or when do they want to do that ... I have no doubt that the Federal Government of the USA is a puppet show. I have no doubt that there must be some hidden upper levels of puppet masters, upon puppet masters, pulling strings. Therefore, the American Wile E. Coyote Moments are actually more under the control of those puppet masters, than what we can perceive in the public puppet show of politicians. Since I basically believe that those puppet masters are planning to finish destroying the American democratic republic, it is not impossible that they would finally decide to enable Wile E. Coyote Moments to happen, when it suits their hidden agenda for that to occur.  

Stackers's picture

Wile E Coyote. just waiting for enough people to look down.

Goldilocks's picture

Wile E. Coyote falls off cliff (0:17)

road runner & wile e coyote - sugar and spies (6:21)

Road Runner & Wile E. Coyote cartoon collection - Zoom at the Top (6:34)

Radical Marijuana's picture

Of the many Wile E. Coyote Moments, I like the one at the 1:30 mark of this:

The Solid Tin Coyote

Coyote steps around the back of a bizarre mirror, only to then discover he has walked off the cliff.

greensnacks's picture

95% of the population hears "fiscal cliff" and identifies it with a moment of fear and panic. They think, "No one wants to drive off cliffs!" And the framework is set to get political buy in for building an even higher cliff and kicking the can even further down the road. It seems both republicans and democrats are playing this game. If it were called something like, "responsible spending act", maybe there would be more public outrage for the deficits being run up by our elected officials - but fiscal cliff ... come on! that's scary and why there will not be a coyote jumping moment in January.

kliguy38's picture

Aren't we getting some new judges on American Idol this season?

DeadFred's picture

Focus more on reality. Why do you worry at all about American Idol when Dancing With the Stars is on?

Pure Evil's picture

Personally I prefer the old fashioned bread and circuses with a little blood letting in the colesseum. Bankers being hacked to bits anyone?

FL_Conservative's picture

I would rather us "go off the cliff" than kick this can one more time.  Enough is enough.  Solve the fucking problem or get out of the fucking way.

a growing concern's picture

And stop trashing my purchasing power.

GeezerGeek's picture

My silver buys more now than it did in 1962. Maybe you just use the wrong stuff to store purchasing power.

disabledvet's picture

Amen brother. Still..we're looking at the wrong asset class. The tell...yet Senator Schumer. He's now ready to blow up the treasury complex to make sure REAL ESTATE prices don't reset...not treasuries as is presented here. What the USA is suffering from is no CARRY to the rates (Senator Schumer yet again...threatening the Fed Chairman no less!) somehow he will now dictate the price of the New York City skyline? Really? When I can have a better building built brand new by Jamie Dimon for 30 million? I mean that is the maximum amount any sane person should pay yes, yes? And that's for the whole building, yes? Obviously yes. The timeline is all wrong at Zero Hedge. This crisis started in Qatar...not New York. Then it spread to commodities...then it hit the Middle East in general, then it hit Japan, then it smashed in the EZ, the Social Media space and now it's smashing into China. All of this is liquidity annihilation...and has happened with SHOCKING speed. Where is the return on one's capital going to come from? Soaring tax rates? Only energy, tech, the transportation sector, large scale insurance and "micro financing" offer the possibilities of "finding the ever elusive Alpha." and the actual places where this is being generated (North Dakota, northern California, Houston, Alaska, possibly Wisconsin, possibly Ohio, possibly Western Pennsylvania, possibly Upstate New York) are too small to generate the growth numbers the overall US economy needs to power ahead "and start paying for things." if there is a collapse in media pricing en toto as there appears to be and I say "look out below" economy.

HurricaneSeason's picture

The crisis started when they went to offer mortgage backed securities for auction and got bids of 20 cents on the dollar due to ridiculous loans and jobs going to China. The housing market was a fake economy to cover jobs going to China and now wars are the fake economy.

KickIce's picture

Spot on, but now you also have to include the national police force, er Homeland Security and the TSA.

HurricaneSeason's picture

Yes, don't forget solar and green initiatives and ethanol.  I imagine a cheeseburger, and gallon of gas, both cost $500 in Afghanistan.  It's hard for Apple to compete with that as far as creating an economy out of thin air.

LetThemEatRand's picture

Hmm.  I don't remember climbing up a mountain when the Bush tax cuts went into effect, but now I'm supposed to believe there is a cliff associated with their expiration?   I just remember a bunch of rich people getting richer while the economy went down the toilet because trickle down doesn't work and "free trade" sent what was left of our manufacturing base to China for the cheap labor and non-existent environmental laws.

Tijuana Donkey Show's picture

The tax cuts were to hide the loss in wages and purchasing power. 

LetThemEatRand's picture

Perhaps in a small way, but they were designed primarily to benefit the wealthy.  More than half of the dollars saved are saved by .1% of the population.   The little people were thrown some crumbs so they could be told that everyone was benefitting.  Most people spend more on cellular phone service over the course of a year than they save in taxes from the Bush cuts.

Sofa King's picture

Why is it that brainwashed liberal morons refuse to admit that the problems we have are a direct result of the decidions made during the Clinton.

I am not saying that because of my political affiliation, I am saying that as an American. The only think the Clinton Dynasty has and continues doing, to this day, is poison our country.

Blame Bush all you want but it takes time for poison to work its way through a system and Buba introduced it.

LetThemEatRand's picture

Are you a brainwashed conservative moron, or do you just like calling people names over views they do not have.  I blame all of the politicians going back to Reagan who started this whole nonsense of trickle down economics aka redistribution of wealth from the middle class to the uber rich.  Clinton gets plenty of credit and he used his Democratic credentials to sell an oligarch friendly and middle class destroying trade policy that probably would have been impossible for a Republican to sell at the time.  Both parties serve the bankers, the defense contractors and oil sector, and the mega companies that own them.  You can stick a blue tie or a red tie on any of them and they all do basically the same thing -- implement policies designed to increase the wealth at the top while we are told the rest of us will benefit.   They say different things, but their policies in action are almost identical.  Amazing that most people believe one of the ties when the proof is right before their eyes that neither party gives a damn about them.

FreeMktFisherMN's picture


I just want a free market, i.e., only voluntary actions, and one in which people can be left alone. You are caught in the cognitive dissonance of trying to stopgap problems that were CAUSED by the govt intervention in the first place. Regulation solves nothing. Capitalism rewards things of value and purges the worthless. That mechanism has been interfered with by the Fed and pols who prop it up with funds that enslave the current and future serfs.


Most here know that the Left/Right is a false, dichotomous choice. Conservatives generally at least value people working their way up and earning one's keep instead of just going the 'victim' route and showing envy with class warfare. 


I don't care about what you want to call these things. It's all semantics. Trickle-down indeed is a farce if it is not a true free market, but rather govt picking winners and losers and with big businesses getting onerous compliance costs to go on competitors so they can't compete. In general, yes, with capitalism there will be some uber rich. But to get rich, they had to figure out what people want/value, and then give it to them such that the inputs are less than the revenue, so they make ends meet and profit. I despise cronyism, so don't try to pigeon hole me in that light. 


LetThemEatRand's picture

You and many others misunderstand me in believing that I don't get your point.  As I have said over and over on ZH, I am in favor of much smaller government and getting money out of our elections process including ending the two party system completely.   I also abhor the police state and prison industrial complex we've become.  Where I differ with many here is that I believe government has an important role in things like health care, education, roads, bridges, science (e.g., that GPS system you use is there because of NASA, a government funded entity), airports, pooling of resources for the poor, environmental regulation, anti-trust regulation, courts, etc.  I believe there is no such thing as a true free market.  Powerful forces will always take over and cheat.   By the same token, there will always be "force" used by someone against someone else.  Ask BP about whether they got permission from everyone on the Gulf of Mexico to have an oil spill there.  Ask Standard Oil about what it did to competitors.  Ask mine workers in the 1800s how free they felt.  An elected government that requires taxes to run is much better than oligarch rule.   Oligarchs, King, Queens, etc demand tribute too.   But we can agree to disagree on all that.  I suspect most libertarians would be much happier if my world view came to pass than the status quo and quite frankly I don't ever see the majority of the population getting behind libertarianism.  

disabledvet's picture

Again this is a sime technical issue...has nothing to do with politics actually. "we're so big we don't pay taxes" is the problem...and REIT conversions are the issue. With trillion dollar deficits you have to stick it to real estate as the only thing they produce are liabilities.

FreeMktFisherMN's picture

People can voluntarily chip in and pay for things like space exploration, and they do it more efficiently too due to having private ownership, i.e., direct skin in the game. Also, voluntarily paying for private roads would work better, and those who don't pay don't get to take them or whatever rules the owner wants. There is no authority in the Constitution given to the government to be involved in 'education', either. And just look at the results: most money spent per capita, yet lousy raw skills let alone the inability to think for themselves due to the John Dewey dream system of secular, atheistic, state-is-god Marxist indoctrination. 

People should be able to educate their children according to the dictates of their own conscience. This university paradigm is a disaster, too. I would rather pay some business guy to let me be an apprentice for a few years and learn the ropes rather than go to these racketeering projects called universities.

So many like to champion these govt programs, when, aside from their unconstitutionality, which is the major principle anyway, they're all BROKE!  Not to mention the moral hazards they create, like harming the responsible people who pay down their debt and save and are on time with mortgage payments, or who actually run profitable companies, by bailing out the spendthrift and the speculators. Things like 'the money has been paid back by GM' are fairy tales, and even if they were to 'break even,' which, again, is not the case, it's not worth the moral hazard of intervening in the marketplace and is also anti-Constitution. 

northerngirl's picture

As a country we need to do more to move aways from the, "Believe there is no such thing as a true free market", and the elements that support an over reaching government and crony capitalism.

Overfed's picture

The role of government needs to be limited as everything they touch turns to shit.

bookwurm's picture

(((DING))) "Give that man a Qewpie Doll.."

disabledvet's picture

This is a technical issue involving almost entirely the ability to securitize debt and insodoing "maintain pricing power." that has completely collapsed...and has stayed collapsed going on 4 years now. Every time the Fed says "monetize" the debt markets go crazyand buy ahead of the curve. This may make the Fed feel good about itself...but what happens when the market decides not to do that? This has nothing to do with one's political persuasions whatsoever...but instead how one views debt creation and whether or not such a policy it should...cause lending to surge. One look at M2 says "we're dead." so while the heroin shot the Chairman is giving to himself and his fellow Committe members feels some point either growth or inflation...or both...must return. Indeed since we know Governments under report inflation massively...well, let's just say interest rates do not have to move up far formthat to be considered "statistically significant." the problem isn't the trillion in deficit per se but the inability to drive asset prices "at large" higher thus as a consequence "paying for things." hence "The Confidence Game"'is still playing out.

oldman's picture


Bravo, Sir,

I remember walking out of a meeting in 1980 or 1981 where Laffer was explainig 'trickle down'. It sounded like bull shit then and after Clinton finished his at-bat, everyone knew it was bull shit. It should hae been referred to as 'gushing up' and not 'trickle down'.

The meal is finished, the check is in the middle of the table and no one is fubling in his pocket for the money to pay, the last one to go to the pisser is stuck with it all.

Many of us have been wondering for three decades-----who will be the last man out      o


ZFiNX's picture

This concern presupposes that some war won't break out that gives congress a reason to expedite a raising of the fiscal cliff.

SilverFish's picture

They will kick it down the road as long as they need to. All they care about is making sure it doesn't happen on their watch.


This is their only concern. As simple as that.

ZeroAvatar's picture

Agreed, SilverFish.  If Oblowme was any kind of President, he'd be working on solving the problem NOW!  Instead, not only has he not given it any attention, but he's PUTTING OFF giving it any attention until AFTER the election......he may not need to deal with it at all, so why start now?


Long golfing communists.

Breaker's picture

He's not putting it off. He has no interest whatsoever in reducing even the rate-of-growth of federal spending. He isn't interested now. He won't be interested if he is reelected.

GOSPLAN HERO's picture

Collapse, female dogs!

Inthemix96's picture

I remember a while ago when the US reached the 5 trillion mark in debt and thought "this is it, no fucking way they can delay this epic crash", now that was some time ago.

Now the number is closing on 17 trillion in debt????

How much longer can these mother fuckers keep this up?  When this goes down it will be the end of the world as we know it.  These numbers are so large and so unbelievable to your average joe, when it does come down who in gods green earth knows what the fuck will happen?

Lets be hoping ben "shalom" bernank gets his though, the poisoned fucking dwarf.

Clinteastwood's picture

Fiscal "cliff" my ass.  There will be no Wile E. Coyote moment.  Congress and president zero will spend beyond belief.  


There will be no improvement in morale until the beatings until Congress, president, supremes, and fed bureaucrats live by the same laws they expect everyone else to live by.


(Can I get a Social Security amen?)

Goldilocks's picture

The Solid Tin Coyote (6:17)

Coyote and RoadRunner - Out and Out Rout (29.01.1966) (6:01)

syntaxterror's picture

Well said. President "I'll cut the debt in half" Oblahblah knows how to do one thing well: spend.

Yen Cross's picture

Tyler, I worked through your first set of charts. I think there is a strong possibility of a credit downgrade even if the "fiscal cliff" deal is done before February. That debt ceiling debacle is really the "canary in the coal mine", issue. The longer the fiscal cliff issues drag on, just exacerbates the "debt ceiling" issue.

 I wouldn't be surprised to see a downgrade, right after the "fiscal cliff" is resolved. The excessive spending will/has to continue s/t, and the debt ceiling has to be raised.

fonzannoon's picture

S&P has to downgrade, and they will. This time though instead of the media screaming the sky is falling they will scream who gives a shit. They will point to the last debt rating downgrade as their evidence it does not matter. Hell it will probably be fodder for them to dismantle the ratings agancies. People will wake up slowly, one at a time, until one day too many are awake and can't deny reality and thats when we hit the ground face first.

ebworthen's picture

So will the S.E.C. go after S&P the way they did Egan-Jones or is S&P "o.k." because they get ca$h from those they do the ratings for?

Will the S.E.C. go after the B.L.S.?

Will they go after Jon Corzine?