A Reminder Of Why A Fiscal-Cliff Compromise Is Not Coming Any Time Soon

Tyler Durden's picture

CEOs suggest a major reason they are not spending is 'policy uncertainty', politicians blame the other side for stifling growth because of 'policy uncertainty', and brokers, bankers, & economists whine that the only reason the Dow is not at Bernanke's goal-seek'd 36,000 is the 'policy uncertainty'. If only the 'fiscal cliff' issue would go away - we'd all have a pony and life could go on. Sorry to burst that bubble; as we noted here, the market is priced for a total compromise and earnings expectations appear to imply a full fiscal cliff resolution in Q4. The hope remains that 'even if we were to go off the fiscal cliff, the political reaction will be swift and vengeful and we will see a 'V'-shaped recovery - so do not worry'. There are two small (ok, very large) problems with that thesis: 1) the self-reinforcing shadow-banking collateral squeeze that would occur as asset values dump again and liabilities remain; and 2) the record-high polarization among our political class. Something to ponder as earnings outlooks continue to drop...



Chart: JPMorgan

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prains's picture

team fuchsia doesn't need to compromise with itself_ plan your retirement accordingly

TruthInSunshine's picture

The fiscal cliff is a big nothing burger since team red and team blue both work for the same Banking/Financial-Military-Government Unionized Worker complex.

Neither of the two Amerikan political parties, that talk up and argue over social wedge issues, to keep the electorate distracted, but do the same shit for the same masters on the actually important things, will do anything to lop a single penny off of the deficit, let alone the debt.

Spending cuts to a modern American Politician would equal a rise in the budget that's consistent with the claim rate of overall inflation...in fact, that would be American "austerity."

Hedge accordingly.

markmotive's picture

Just another risk that could send us to the edge of financial collapse...again.


prains's picture



i thought team fuchsia sort of summed it up myself but still don't understand how your more erudite explanation got junked, i think the word count mighta worked against ya

TruthInSunshine's picture

I'm too verbose. I don't mind junks at all, though. Sometimes I fantasize they're junks from government sock puppets, and it gives me pleasure to think I'm eliciting their multiple-identity, virtual attention.

"Team fuschia" is a perfect descriptor.

prains's picture

As part of the less capable but interested janitorial staff at ZH, a tip of the hat

LetThemEatRand's picture

The junks don't understand the color-representation of the combination of red and blue.

prains's picture

art 101 those were the days, who would have thought it might come in handy

Eireann go Brach's picture

Did you see the Obama 2016 movie? Time to send him back to the hut in Kenya!

Tijuana Donkey Show's picture

And in a darkness, lobby them..........................

hedgeless_horseman's picture



On a long enough timeline
the dissention rate for
every politician drops to zero.

darteaus's picture

Are you saying you want a lot of hung people?

drink or die's picture

I hate diehard sportsfans and I hate Republicans and Democrats.  From the outside, they seem exactly the same.  Maybe in the future, all political decisions will be solved by football games?

Lohn Jocke's picture

New study reveals that watching CSPAN induces more cerebral injuries than the NFL players receive from blows to the head.  

A Lunatic's picture

You mean fake polarization. So far neither side has had any real reservations about the direction we are headed.

prains's picture

some of the polarization isn't fake but usually comes in the form of social questions "to be baby or not to be baby" etc

lakecity55's picture

yeah. the poli-ticks are only worried about their shit.

we are way down the list.

kito's picture

Where is the chart that shows both sides voting with their parties AND the other party.......ndaa....patriot act.....tarp........wars.........drone bill.......etc

ArkansasAngie's picture

It's the same as above ... they vote against ... then they vote for in the spirit of compromise and doing what they wanted to do in the first place aka screw the American public.

odatruf's picture

Where also is the chart that separates important votes from time filling votes? A huge proportion of the votes cast are to accept the previous day's journal, to rename a post office in Ypsilanti, to honor the Kenosha Little League Team, etc.

monopoly's picture

So, if we all just continuing drinking the Kool Aid, we get a "pony". All right. Over the cliff all, Follow Me......

I think I am going to be sick.

darteaus's picture

Shut up, work harder and pay more taxes.  Now, give me you guns and your gold.

darteaus's picture

In addition to nothing getting done because no politician wants their hands dirty right before an election, nothing will be done about the fiscal cliff for at least two reasons:

1)  If Obama wins, he wants to sink the US and going over the fiscal cliff is just one more step in that direction, and

2)  If Romney wins, the Democrats want to sink the US and pin it on the Republicans to "prove" electing Romney was a mistake.

XitSam's picture

I'm thinking the lame duck congress will pass a continuing resolution to delay the cliff until the new congress is in session.

Harbanger's picture

The government is currently operating under continuing resolution which provides funding through March 27, 2013.  In 1995 under Clinton, Congress actually shut down the Federal Government.  No one missed them.

Offthebeach's picture

I like it when they say, " all non-member essential worker stay home( paid )" and only 15% show up and everything runs smoother.

darteaus's picture

One misleading thing about that chart: the Vietnam war and Watergate

Members of Congress increasingly found it politically advantageous to buck the party leadership - until those events were over.  Then it was back to "politics as usual".

kito's picture

Is gold pricing in the cliff or a Romney win or both?????????.........

disabledvet's picture

REIT's are, that's fer sure. No it's not as presented here "due to Bernanke"...but obviously "due to the IRS." this whole "endless speculations using Government influence" has run its inevitable course. the end of "the great corporate tax holiday" is over. If you're not hiring tens of thousands of 'mericans, YOU'RE FIRED!

fonzannoon's picture

look at the market today kito. fudged earnings sends stocks up. fudged economic data sends gold down. and we are supposed to infer something logical from this? it's pure insanity. 

hawk nation's picture

based on this article i guess this would cause gold to sell off makes about as much sense as the current price of gold

Ham-bone's picture

Tyler - please discuss the baseline belief of what happens if we do get a "compromise*".  I hate to agree w/ Goldman's quick down before markets continue rising in 2013.  Why should we believe in the cliff?

*compromise = dems extend middle class tax cuts and maintain all social programs while Repubs extend tax break for high earners, dividend, etc. all to be payed for in a phased in approach starting in 2016'ish.

Seriously, what implication is there if a "compromise" is made that benefits both parties, is roundly downgraded by all rating agencies while yields sink to all new lows?  What?  Dollar depreciates (yes against gold), but...how if everyone is evenly debasing?  Commodities rise?...how if global demand is collapsing while oversupplies in oil, mining, etc. cause downward pressure offsetting fiat weakness.  The real problem from this won't be felt til demand eventually outstrips oversupply.

I don't see the case for a self inflicted slowdown in '13...just continued or even expanded budget deficits and "growth" via printing and Fed repression.

odatruf's picture

Ham - the only logical slowdown is caused by that unprovable but intuitive uncertainty fairy. Business decides that uncertainty is too great and they hedge by holding cash that might otherwise have gone into plant, equipment, new hires or other capital outlays. Or paid out as dividends for larger concerns.  Why else is corporate cash accumulating? They are doing the B-School 101 SWOT analysis and deciding that hording cash is wise because of the  volatility of possible outcomes.


CrashisOptimistic's picture

What is a compromise?

What does it mean?  Does it mean there WILL be a tax increase, but not so big as the total feared?  Call it $160 billion for the SS tax restoration (the Dems have already said they will not defend that cut) and maybe half the Bush tax cuts are allowed to expire. That's what, another $160 billion?

So $320B and now we turn to the Sequester.  It's $140 billion in 2013.  So maybe half of that?  

That's a total of $390 Billion off GDP, or 2.5%.  Anyone really think 2.5% GDP growth is in the cards for Q1?  No?  Then it's going negative even WITH A COMPROMISE.

Ham-bone's picture

Why believe any of this?  Think back to the debt ceiling and previous charades.  Much ado about no spending cuts.  Neither party is going to make any significant cuts or allow taxes to reinstate themselves.

And for the sequester, it is not a "cut" of $110b in '13, it is a cut against the baseline growth.  So '12 and '13 budgets are both $3.8T...no cut, just no growth that was planned.

CrashisOptimistic's picture

They are baseline cuts, but the baseline growth curve is supposed to be defined by inflation.  A cut from that is indeed a GDP hit.

Yes, it is a cut from spending growth that was to occur, but the growth is nominal.  The cut does turn out real.

If there's a government project . . .funding a private contractor, and that contractor hands out pay raises to their people, and even if they don't, they have to pay more for raw materials, and then their funding from the government doesn't cover the increases because the budget is flat Y-Y -- that's a real cut.

I was disappointed that there was almost nothing in FY2012 and I thought Boehner's deal was weak in that regard, but the spending baseline cuts ARE equal to the debt ceiling jack in 2011, and they will be again.  He has already said nothing has changed.  Once again any ceiling increase has to have equal spending cuts, and the Tea Party -- with extra seats won upcoming -- will again insist on it.

odatruf's picture

Crash - the growth of government spending is much more than nominal.  I defy you to plot spending against inflation for any significant modern time period and have it match.

Tom Green Swedish's picture

It's simple, yet nobody seems to get it.  There will be no reduction to the deficit.  Write your congressman and ask them why they owe US (yes thats our money) and other countries 16 trillion dollars.  You can't make that disappear. Thats why we have QE. Austerity does not work. PERIOD.  For austerity to work somebody has to give up something, and I guarantee you the government workers aren't going to give it up.   Romney and Obama will try to fool you but anybody with half a brain knows there will be no reduction to the deficit.

lemonobrien's picture

i believe in massive selling at the end of the year.

Ham-bone's picture

I believe in fairies.

Any reason for your belief???  Sell ahead of tax hikes?  Go where with the money???

odatruf's picture

If you've been holding an asset that has a gain for longer than one year, I think it is prudent to sell before the capital gains rate jumps at the start of the year if an extension is not reached.  You can always rebuy after and if you do it within 30 days you can revert to your original basis.

This only makes sense if there are not huge transaction costs, of course.  I wouldn't go selling real estate or something that you can't rebuy easy, but I am moving off my equities and any other paper instruments.  And I may just find that I can get them at a lower basis next year anyway, that is if I want them.

I am a Man I am Forty's picture

they will kick the can down the road prior to year end because treasury and wall street will run to the POTUS and say the world is coming to an end if you don't do this=> result is tax extensions for everyone, dollar will continue to devalue and debt will continue to go up at a rapid pace

this is the only thing that will pass, if they don't do shit and market collapses because everyone decides to sell because they think taxes are going up everybody will throw all of the politicians out and not just current POTUS.

lolmao500's picture

This is NOT a fiscal cliff... A real fiscal cliff is cutting the entire deficit in one year... that means a 45% cut of the government budget.

Manic by Proxy's picture

"No cost. Absolutely no cost me."

odatruf's picture

Plus no reductions in service.  And, won't someone think of the children!

TheObsoleteMan's picture

Polarization? Not the politicians. It is the American public that has become polarized, and that is precisely what the elites want. There can be no real, meaningful debt reduction as long as the monetary policy remains what it is: Debt based currency/credit creation. If you think things are interesting now, just wait and see what happens once interest rates start to climb. That will be the end of the first world charade the US has been projecting for the last forty years.

ArkansasAngie's picture

Haven't your heard?  Interest rates are not going up.

Bond vigilantes do not exist ... not any more.

Nope ... ZIRP until this wealth transfer excersize is over

Compromise?  Well ... that's what the MSM will call it.

odatruf's picture

Exactly.  What is the difference in the Fed buying 100% of new treasuries and the 70% they buy now? All at ZIRP.

Seriously, where is the evidence that there is any consequence to this? Will our dollar devalue?  Against what? The Euro? They are more screwed. Against the Pound? Sorry, but our "special friendship" prevents that. China? No way they are letting all the greenbacks they hold become worthless. Japan? Canada? Switzerland? 

Inflation? They will redefine it to exclude whatever does cost more. And, with slack production capacity, I wouldn't bet on actual price pressure so long as the currency stays stable.

I'm looking for an honest reply: what will happen if the Fed simply adds to its holdings of Treasuries of all maturities and classes in such quantities as it takes to keep interest rates near zero for as long as the government needs to kick the can?