On The Fiscal 'Cliff' (Not 'Slope') And The 3 'F's Of American Policy-Making

Tyler Durden's picture

Some policymakers (and commentators) are attempting to make a molehill out of a mountain; seemingly less worried about the outcome of negotiations in the short-term, as they believe the cliff is not a cliff, but more of a slope, since economic damage will initially be limited while any equity market sell-off will only spur a resolution. We tend to side with Barclays and BofAML that the full set of expiring measures constitutes a cliff, not a slope. In brief, here is why - automatic withholdings and in Geithner's words "no authority to delay the process." The extent to which households can buffer this higher withholding is significantly weak as recent 'savings' rates have plunged - implying a need to draw on liquid assets to smooth any consumption shortfall. Citing Winston Churchill, BofAML sums up the siutation well - "You can always count on Americans to do the right thing - after they have tried everything else," and we remain stoic that stock market weakness and severe outside criticism will be important in forcing any agreement, as the politicians appear to face six signficant hurdles ahead.

It seems to us like we are following the same path as last year's debacle - what we like to call the Three 'F's of Fiscal Policy in America... Fear, Faith, and Oh F##K!!


Via Barclays:

Given the tight legislative calendar and the two parties’ gaping differences of opinion, we see a strong possibility that policymakers will “go over” the cliff, raising questions about how quickly a resolution can be reached before serious damage is done to economic activity and financial markets.




Some policymakers appear less worried about this outcome since, in their view, the cliff is not a cliff, but more of a slope, meaning economic damage will initially be limited while any equity market sell-off will only spur a resolution.


Our view is that the full set of expiring measures constitutes a cliff, not a slope. Although the full $650bn drag does not go into effect in January and will instead be phased in over the year, about $500bn of the total relates to revenues. Automatic withholding will begin to rise in January and Treasury Secretary Timothy Geithner has said his department has no authority to delay this process. Thus, additional withholding at a rate of about $40bn per month from higher marginal income tax rates, a higher payroll tax, and the alternative minimum tax (AMT), among other items, clearly point to a cliff in the BEA’s national income accounts (Figure 4).



The extent to which activity is buffered from higher withholding depends on households’ ability to smooth consumption. We believe households have limited room to maneuver. Personal saving in Q3 averaged $445bn (saar), about $100bn below the 2010-11 average and similar in size to expiring revenue provisions, suggesting households would need to draw on liquid assets. Moreover, saving is not evenly distributed throughout the population and tighter credit standards would likely limit many households’ access to credit.

Via BofAML:

Winston Churchill famously said “You can always count on Americans to do the right thing—after they have tried everything else.” This certainly seems to be the case with the fiscal cliff. Politicians have given themselves an almost impossible task. Consider the challenges:

  1. The election has returned the same cast of characters who created the cliff. Both parties need to do a 180-degree turn to compromise.
  2. The gap between the two parties in terms of both interpersonal relations and policy views is arguably the widest in modern history.
  3. They need to reach a deal by year end. And yet, in the first three weeks after the election there was just one brief meeting.
  4. The cliff involves 10 large and complex policy decisions: the Bush tax cuts and the sequester are only one-third of the cliff.
  5. Every recent major fiscal decision has gone to the last minute, with many false signals of a deal along the way.
  6. The debt ceiling hits shortly after the cliff. If it is not raised, the resulting austerity is more draconian than the whole fiscal cliff.

Our baseline forecast assumes a long, painful decision process followed by significant fiscal austerity. We expect a partial deal in late December where the two parties agree on some items and postpone others for several months. By the spring we expect all of the cliff items to be resolved and for there to be a process in place for negotiating entitlement and tax reform. We expect austerity equivalent to about 2% of GDP to kick in over the course of the first two quarters of the year (Table 2). We think stock market weakness and severe outside criticism will be important in forcing an agreement.


Some pundits dismiss the economic damage from the cliff. One view is that it will be resolved at the last second and the markets will quickly realize it was a nonevent. This ignores the fact that, unlike past brinkmanship moments, the cliff ends with significant fiscal tightening. Others argue that the fiscal cliff is really a fiscal slope: it will take time for austerity to impact the economy and people will largely ignore any tax increases or spending cuts because they will “know” they are temporary. This ignores the large and growing uncertainty shock from the cliff.


There has already been some belt tightening. The OECD estimates the structural deficit has already been shrinking by about 1.3 pp per year as federal stimulus fades and state and local governments cut. Assuming some slowing in cuts at the state and local level and our baseline for federal fiscal policy, the fiscal shock roughly doubles to about 2.5 pp in 2013. That’s a big hit for an economy that has had average growth of 2.2% since the recession ended back in 2009.


The cliff shock will likely rotate through the economy. Business leaders have already cut capital goods orders in anticipation of the cliff, but once the cliff is resolved we expect the release of some pent-up demand for capital. By contrast, households seem to be oblivious to the cliff. However, with the cliff now moving from business to front page news, we expect consumption to cool. Moreover, the tax increases and transfer cuts from the fiscal cliff will likely cut 1.9 pp off of income, stopping the growth in real disposable income in 2013.


In our base case, once the cliff is resolved, the economy will return to its moderate recovery. There has been substantial healing in the private sector since the 2008-09 crisis, and we are particularly encouraged by the housing healing. In other words, the 50 states are fine; the District of Columbia is the problem.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
greased up deaf guy's picture

ot - has anyone watched the full version of this before?


it's an hour-long documentary called "end of the road" and i stumbled across it by accident on netflix while searching for the movie "the road" recommended in another thread. it's quite good, although it's not new information to most folks here :).

back on topic... long december and january spxl puts ;)...

ACP's picture

I also found a video, which was much more entertaining:


fourchan's picture

2009 was a preview of what is to come.

TheFourthStooge-ing's picture

The Three 'F's of American Fiscal Policy:

Falsification, Fraud, and Fuckery.

markmotive's picture

As the Black Swan (fiscal cliff) approaches, the Black Swan (Nassim Taleb) resurfaces to comment.


Bananamerican's picture

"we are particularly encouraged by the housing healing. In other words, the 50 states are fine"


Urban Redneck's picture

In our base case, once the cliff is resolved, the economy will return to its moderate recovery.

The Bootlicking Bitches at Barclays apparently have never actually read the the several thousand pages of Obamacare, much less the the many thousands more pages of 42 CFR HHS regulations that have subsequently been issued and begin going into effect Jan. 1.


Offthebeach's picture

Talked to a older, working white, married female. Uber low info voter. She voted for Obama becasuse, " Bush was going to raise her taxes."

I said Bush wasn't President anymore.
She acknowledge that, but she sais, still,
"That's what I heard."

They had hired me to paint a couple of rooms and hang their flatscreen, which was on a crendenza, always on and on insipid daytime talk shows.

I don't think she even knows about any 'cliff.'

A lot of dumb, low class people think TV is reality and their lived and lives around them are some sort of injustice and / or annoyance of their spirit, imagined lives on/with TV.

insanelysane's picture

I was in a small store a few days after election and this is the conversation I heard.

Young female worker: "So glad the election is over.  It was scary."

Older female worker: "What?"

Youngun: "We are lucky Obama won."

Oldun: (scowling) "Why do you say that?"

Youngun: "Cause Romney was going to outlaw all birth control."

Uncontrolably I let out a burst of laughter and the 2 of them just looked at me.  

I have no idea why I laughed but it just shows how blissfully uninformed the electorate is.

BlackholeDivestment's picture

 ...just thinking out loud, again. Lol.

Interesting TheFourthStooge-ing, those three words match the image of the (6 ''significatn'' hurdles) and put a face to the last words of this article, the image of a man, his name and number 666. You have to understand ZERO (0) though, to reckon the image of the fiscal beast and the sealing of the debt ceiling and combine it with the crypto fascist foundation for the President's New World Order SEAL TEAM.

...here is revelation: Remember when the asshole in the White House gave his zero hour, at zero interest, 100% Debt to GDP Speech from inside a room in the White House that had a window you could see the Washington Monument through? He said that this worlds largest obelisk was not shut down and open for business. This is the same asshole that said he accepted Christ as the Groom and that we are all the Bride. Then, this asshole said he now believes in ''change'', a sex ''change''. Now  this asshole is the Groom open for business. So with that in mind, and those 3 words and 6 signs, lets see what the delay of this SEAL TEAM 666 looks like through the eyes of a person that represents the entire country and people of the United States, for example lets use the dead Ambassador's Eyes and his dead SEAL. Now, look through the White House Window like a cryptologist and lets consider the ZERO HEDGE. What does it all mean? Let's see the true power behind the value of this asshole and his team?  

O=Nothing, no meaning. So now that we have that ''key'' we can unseal Mystery Babylon, if you will. 

The asshole pointed out the image of the President, and he is the President, the asshole that want's all people to accept that he is the Groom. That has ZERO credibility. It's the black hole. Now you are getting the picture. 

So, lets count the number of the image of the President, and remember, this is not Christ telling Satan to get thee behind me, this is an asshole that is screwing himself right in front of you. OK, so, three F's and the 6, that combination has got to have a name and a face that represents the SEAL TEAM delay, so lets dial in the numbers of the 2 Parties and get the full picture. The Washington Monument is 555ft tall. Hmmmm. OK, what does this image reflect? Oh wait a minute, what is that pool outside the White House window. I bet when he gave his zero hour speech it was dark. Hmmm, a dark pool. .....BUT!, at night, when he spoke, that big phalic symbol was illuminated, so you could see the image in the reflecting pool. Hmmm, what would SEAL TEAM Crypto Fascist do here? Lets brake the code shall we? Hmmm, ZERO, ZERO Help on 911 2012. Wow, this is grave. It's a Graven image. Let's see, 555ft phalic symbol on the ground and like a Legion of possessed pigs sealed in water, 555 is reflected in the pool. Hmmm, ZERO meanssssssss ....nothing. Ah ha. 555+555=1110<--Zero means nothing. ADD the two together, minus the zero and the water, that's 555+111=666  

...do you reckon the name and number of a man now ...bitchez? ...or should I say in this case example, ''Ambassador, is she dead? ...is America, the people, are they dead? Shall we dial 911? Hello, is there anyone out there to arrest the killers, or does this mean war? 

Take a look over your shoulder, look back through history, everyone is dead. That is no foundation for victory. Just who the Hell do they think they are fooling? Is it you? That is a general indirect question for all. 

I hope the answer comes without delay, that's not a cliff ...when you are in the black hole. I sure would not take 'til 2112, looks clear enough what their team has planned, the numbers are already in, this means war.

Silver Bug's picture

The fiscal cliff will be averted. It is QE to infinity.



andrewp111's picture

QE doesn't help this time unless the President usurps the Congressional power of the purse.

Offthebeach's picture

We are at war. Forever. So, Hussein, and ButtBoy Timmah will what the want.

Next time, on a clear still day, that you hear a drone fly over, and maybe bairly see it way up high, remember to smile.

( BTW I am looking for investors to help me with a pitch to Homeland Security. I'm going to radically cut drone costs by using Chinese made and China operated Deon's for Homeland contracts. I have a fully equipped Chinese partner already. Nice guy. I just need investors for maintenance here and Democrat Republican

Urban Redneck's picture

The competition with the MIC at their pwned lackeys at the federal level would be very difficult, but perhaps at the state-level authorities could be persuaded to ask for Drone$ handouts from DHS (as long as you avoid the mention of Chinese manufacturers in the federal request and include all the PC & Appropriations buzzwords you can structure a selection program where the Chinese would win at the end of the day by virtue of price durability etc.).

Alternatively, there are all sorts of creative vendor financing solutions that various entities in China offer- I can't see why getting their hooks into the state-level government apparatus wouldn't be attractive.

As much as I hate corruption and what passes for public "investment"- doing it cheap (lower cost to taxpayer), doing it local (anti-federalism), and screwing Uncle Sam and his merry band of Kleptocrats in the process has a certain appeal.  But there is no way in hell I would personally invest in any venture in the US now.  Good luck.

foxmuldar's picture

Watch Morsi of Egypt and you can see what Obama is trying to do. Does anyone think he cares about cutting the deficit? He has the media on his side. He has Millions of free loaders that want to sock it to the rich believe the BS Obama says about saving the economy if we can just get the rich to pay a little more. What a crock. Why did Obama raise the taxes he wants from $800 Billion to 1.6 Billion after the election. Why does he now want full control of the debt ceiling. Does anyone here really think even the wimpy GOP is willing to give in to those demands? So we go over the cliff and the media blames the GOP. Obama ends up looking like a hero when he declares a state of emergency and uses an executive order to take full control of all spending and most everything else. Just like Morsi. Think it can't happen, well didn't Obama use his executive power to pardon millions of freeloading illegals when a few years earlier he claimed he didn't have that power. Who's to stop him if nobody steps forward to fight his actions? 

andrewp111's picture

He can only be stopped by impeachment. As long as 1/3 of the Senate supports him, Obama can do whatever he wants.

foxmuldar's picture

Yes and we have seen Obama doing whatever he wants and nobody challenges him. Fast and furious, Benghazi, Immigration reform without congress approval. We haven't seen anything yet. Forget ever seeing the keystone pipeline. Obama doesn't want folks working unless they work for unions. The rest of us he wants to put on welfare. Obama's Banana republic is coming to a neighborhood soon. 

jtg's picture

Far worse is to come from Obama. The American people show themselves as idiots for having re-elected him, so they'll deserve what they get.

jtg's picture

foxmuldar is right. By using a psychological analysis of Obama it is clear he doesn't care about America or its people since he is of the third world mentality that thinks that our wealth was stolen from the third world, that we deserve the fiscal cliff and to be cut down. foxmuldar is also right that Obama and the media have already prepared to blame the GOP no matter what happens. I have little pity for all my middle class stupid friends that love Obama; they will get what they deserve.

Lord Koos's picture

It's all Obama's fault.

Yen Cross's picture

 The election has returned the same cast of,

   "#4/Quote "endless spending sold out representatives living in fantasy land"...

   I'm beyond name calling, and raising my voice/ It is so sickening that I value my health more than this "giant heart attack" we call the United States!

Everybodys All American's picture

The fiscal cliff is actually a budget that still spends much more than it takes in. This just points out how out of whack we are with reality because of years and years of wreckless spending.

Lord Koos's picture

Yes, how long can the economy continue to be wreckless.  I'm a reck just thinking about it.

Zer0head's picture

I have always had a great deal of faith in anything that comes out of Barclays.

razorthin's picture

This fecal cliff is BS.  Like December 22, 2012, it will be another fucking day.  Any "constraints" within the greater fiat, debt-based paradigm are imaginary.  Print or die.  And fuck you, Ben.

docmac324's picture

+100.  This is the 2008 equivalent of Paulson beating his chest and warning if the banks are not bailed out, we're all going to die.  I am still here, and so are you.

Atomizer's picture

For those of you who critique ZeroHedge, and still enjoy pre-skool.


Point A: Government Debt and You

Point B: Global Debt for Dummies


When you take point A and subtract point B, a colossal withering begins. Show me were your handout entitlements will be shifted to prop up civil obedience. Waving a steak in front of the cage has desensitized the imprisoned animal. Looting more money to feed hungry mouths filet mignon will only buy a stint of reprieve.

Schmuck Raker's picture

Can we substitute "Fraud" for "Faith", please?

woggie's picture

does'nt all this pale vis-a-vis 20, 80,  120 trillion is debt/ liabilities? chicken shit really.

Wun Hun Lo's picture

long wice & water bitchez

Atomizer's picture

Wun Hun ro.


Water discovered on mercury. But still t Boone Pickens has his lucky reservoir up for sare. /LOL

q99x2's picture

Hasn't anyone heard of Dow 13,000 yet. The markets have nothing to do with the economy and the economy has nothing to do with the markets so we can count markets as off limits to whatever the reduction on US economic activity is as the result of cliff or no cliff. I think the cliff means that the FEDs will be able to lie to fewer people by saying the economy is growing even though there are fewer people working. The people not working don't count anyhow so no big deal.

Definition of Fiscal Cliff - One of many ways Banksters work with politicians to transfer wealth from countries (via Governments) to them (the banksters).

Yen Cross's picture

That chart is a screen shot Tyler/ That rivals WB#7 in creativity!

honestann's picture

The fiscal cliff isn't very important, the debt limit is.


Cut spending --- massively.  Nothing else matters.

ItsDanger's picture

Isnt this fiscal cliff a result of the last debt limit crisis?  Doesnt that mean there will be another cliff in mid2013?  How many cliffs can one fall off anyways? 

andrewp111's picture

You can bounce down one cliff after another until you go down the rabbit hole under the last one. That is when POTUS declares an emergency and grabs absolute power so he won't ever have to negotiate with Republicans again.

Mike in GA's picture

Yeah, nine lives THEN the cushy retirement during which they'tr exempt from the laws us little people live by...bastards all.

MarcusLCrassus's picture

But I thought the government didn't create jobs.  So let the budget cuts go into effect, and it both lowers the deficit and reduces the government's impact on the free market.  

insanelysane's picture

Exactly!  People will be forced to adjust their lifestyles and only by the things they truly need.  It may suck for the people that make and sell useless crap but we need to face reality at some point.

polo007's picture

A Senate Republican aide tells Breitbart News, “It’s clear that the White House is becoming increasingly comfortable with the cliff dive. They’re just not engaged. They’re less engaged than they were two weeks ago.”


polo007's picture

Sen. John Cornyn (R-Texas), who will soon be the second-ranking Republican in the Senate, on Friday panned a proposal by the White House that would allow President Obama to raise the debt ceiling without congressional approval.

Cornyn was referring to a plan Treasury Secretary Tim Geithner presented to Speaker John Boehner (R-Ohio) on Thursday that was meant to avoid the "fiscal cliff" of tax increases and spending cuts.

The plan, which sparked strong Republican criticism, included a provision allowing the White House to raise the debt ceiling without the consent of Congress.

"Well, it's outrageous," Cornyn said on Fox News.

"It's like saying we maxed out our credit card so I'm going to get a new credit card with no limit so I can keep spending. There needs to be some accountability here and, so far, we're spending 42 cents out of every dollar in Washington and that's borrowed money. And that's money that our kids and grandkids are gonna have to pay back."


mvsjcl's picture

"...And that's money that our kids and grandkids are gonna have to pay back."


Ain't nobody payin' back shit. Instead, what's yours will be taken away from you. That's the Big Game being played here. Always has been.

expatincentam's picture

Well, hey, we've already chucked most of the U.S. constitution.  Why not just throw Article I, Section 8, down the memory hole, too.  It says: "The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay for Debts;... To borrow Money on the credit of the United States; To coin Money, regulate the Value thereof, and of foreign Coin...; To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers..."  Come to think of it, what does Congress actually do that has any real relationship to its originally enumerated responsibilities?

Lord Koos's picture

Case in point - they haven't bothered to declare war for 70 years... although we've had plenty of them.

azzhatter's picture

Hussein is comfortable that any fallout will fall on repubs. He is happy to fall off for political gain. He has the media, the ignorant population and the libtards. We're going over anyways. Why waste a crisis? 

hooligan2009's picture

sigh, the US is already over the fiscal cliff. what part of three consecutive years of deficits in excess of $1 trillion do people not understand. 

the "debt ceiling" is not even the bottom of the cliff on which the economy crashes. it is the credit card holder setting his own credit limit when he can already never pay back the one he set himself ten years ago.

better to call it "slowing the descent to ruin"

NoTTD's picture

Burn, baby, burn.  But I repeat myself.


Dive! Dive!! Dive!!!

eaglerock's picture

The most important motivators for politicians are: don't make a decision that will anger any of your constituents; and don't get blamed for anything.  I believe these two motivators are stronger than the desire to destroy the other party.  Under these rules, the only possible outcome of the fiscal cliff talks is that they will come up with an incredibly creative new way to kick the can down the road some more.