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What’s over the fiscal cliff? We may be about to find out

Congress and Barack Obama have gone on holidays without a deal on the “fiscal cliff”. The chances of anything more than a temporary fix now look remote.

The United States isn’t quite teetering on the edge of the fiscal cliff but it’s currently a whole lot closer than many would be comfortable with after Congress went home for the Christmas break and President Barack Obama flew to Hawaii with no deal.

Under the terms of the debt ceiling agreement thrashed out in August last year, US$109 billion in ‘sequestrations” a year will kick in on January 2, while a round of Dubya-era tax cuts expires on 1 January.

Obama had proposed that the tax cuts be made permanent for those on incomes below $250,000 while the rest expire. House GOP leader and Speaker John Boehner tried to put forward a bill to make permanent tax cuts for those on incomes below $1 million, but such is the intense antipathy toward taxes in the House GOP caucus, where Tea Party sentiment runs strong, that this was rejected by his own party. Boehner withdrew that bill rather than put it to a vote.

Hopes for a “grand bargain” in which spending cuts and limited tax rises would be agreed now appear off the table after negotiations between Obama and Boehner broke down. According to a reconstruction of negotiations by The Wall Street Journal, the re-elected president played hardball with the Republican, conscious that the GOP has managed to identify itself as the party of political dysfunction in the eyes of most voters. Obama knows the Republicans will wear the blame if there’s no deal.

The best hope now is a bill to limit tax rises to incomes above $400,000 or $500,000 and, likely, a delay in the sequestration for further negotiations over a long-term deal on spending. The problem is, if Boehner can’t deliver his party for tax rises for millionaires, delivering it for a lower figure looks problematic. There is also the possibility Republicans may filibuster in the Senate to prevent such a deal.

The talk now is thus what happens when, rather than if, the US goes over the cliff, although a deal in January would avert nearly all of the sequestration impacts.

But even an agreement to simply delay a resolution of the debt ceiling and budget deficit issues may weigh heavily on the US dollar, with flow-on upward pressure on the Australian dollar, and the US stock market, with flow-on effects for local markets (there is also a theory that a successful resolution of the issue, which would be good news for the global economy, would also weigh down safe haven currencies like the US dollar and, perhaps, the Australian dollar).

Ratings agencies may also react adversely, given Standard and Poor’s has already downgraded the US’s credit rating once in response to political deadlock over this issue — although there was no visible impact on the US’s capacity to borrow, which has never been healthier.

As the Republicans’ intransigence demonstrates, there’s no will to compromise despite Obama’s emphatic re-election. Indeed, for many in the GOP, which easily retained the House of Representatives, the anti-tax sentiment is stronger than ever, even despite the notoriously tax-hostile Grover Norquist, in a significant shift, giving the tick to Boehner’s US$1 million plan.

Thus, many Tea Party GOP representatives are now even more extreme than the heart-and-soul of the anti-tax movement.

There’s unlikely to be an outcome from all this that does anything to help Wayne Swan’s faint chances of securing a surplus — another reason why last week’s admission of defeat on that front was necessary for the government. Keep an eye on the issue over the break and into January — it’s likely to have a significant bearing on the progress of the Australian economy through 2013.

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  • 1
    CHRISTOPHER DUNNE
    Posted Monday, 24 December 2012 at 3:45 pm | Permalink

    Norquist became the Disney version of the sorcerer’s apprentice, having cast the spell over the GOP to never raise a tax, he couldn’t find the correct incantation to turn it off.

    Now lots of little brooms are marching them over the cliff. Dum,de dum, de dum de dit-ty dum…

  • 2
    zut alors
    Posted Monday, 24 December 2012 at 5:21 pm | Permalink

    It’s becoming even more perplexing to follow the thought processes of Republicans. Where do they imagine it will all end?

    The US is light years removed from the noble sentiment in JFK’s 1961 inaugural address: If a free society cannot help the many who are poor, it cannot save the few who are rich.

  • 3
    Karen
    Posted Tuesday, 25 December 2012 at 9:33 am | Permalink

    I think Obama should call the Republicans bluff, tell the American nation in a televised speech that due to Republicans blocking modest tax rises for super rich people (as well as blocking stimulatory tax cuts for the middle and lower classes), the Republicans have caused the nation to go over the fiscal cliff. Blame the Republicans for it. Also tell the nation that for there to be real economic improvement to the economy and services, they need to kick Republicans out of the House to get rid of the policy gridlock.

  • 4
    Karen
    Posted Tuesday, 25 December 2012 at 9:51 am | Permalink

    Zut, I agree with yours and the sentiments of JFK, however, I suppose the uber rich think that they can always relocate with their money while America crashes and burns. They might lose a few of their baubles along the way, like the value of their real estate as well as the existential notion of what they’ve always known as “home”, but them’s the breaks, it would appear for them. This is assuming they think they would ever be affected at all.

    I think these people are stupid for thinking this way because the actual losses to them, both financial and psychological, should a catastrophic upheaval result, will be much greater than what they could ever conceptualise. They won’t escape suffering.

  • 5
    Steve777
    Posted Wednesday, 26 December 2012 at 8:09 am | Permalink

    President Obama has to win this. Compromise is necessary but he can’t concede too much. If the Republicans are seen to win, his Presidency will be effectively crippled. Nothing that requires the consent of Congress could be done.

  • 6
    Steve777
    Posted Wednesday, 26 December 2012 at 8:28 am | Permalink

    And why is the USA in its current financial position? Well, George W Bush slashed taxes for the wealthy, started and botched two wars, at least one of which was unnecessary and largely fraudulently based. Add to that, the Republicans’ Wall Street mates running riot and destroying much the the USA’s (and the World’s) wealth, and there you have it. Of course the latter can’t be fully blamed on W, but it came to a head on his watch. Who’ll pay to clean up the mess? The poor and middle class. The wealthy are not prepared to contribute more from that part of their wealth that they haven’t been able to hide from the tax man.

  • 7
    Karen
    Posted Wednesday, 26 December 2012 at 10:21 am | Permalink

    Steve777 - Agree. However, I also blame W for the financial meltdown, as he refused to regulate the finance sector. How is it that the finance sector, aided and abetted by complicit rating agencies, were permitted to sell worthless derivatives on the back of loans they knew the working poor couldn’t pay? This is fraud. No-one from the finance sector has gone to gaol for this, despite the death and destruction this has caused around the world. Their poorer brethren who hold up convenience stores for cigarettes and bread, on the other hand, go in the slammer for years.

  • 8
    gianni
    Posted Wednesday, 26 December 2012 at 4:20 pm | Permalink

    There’s a terrific comment by Charles P. Pierce on the devolution of the Republican Party. The context is the Republican’s negotiating stance towards President Obama and the fiscal cliff measures.

    If one looks at the statements by, say, Cory Bernardi (and Nick Michin before him), or Barnaby Joyce for the Nationals, one can see that the policy trajectory of the Coalition is taking them to the same place as the Republicans.

    The same processes are at work: The rejection of science and reason when it disagrees with their ideological stance, the embrace of truthiness> as the basis of policy development, and the proud disdaining of knowledge and expertise. We’re not so different from the USA. Which is why the opening paragraph of Charles Pierce’s column resonates.

    There is no possible definition by which the Republicans can be considered an actual political party any more. They can be defined as a loose universe of inchoate hatreds, or a sprawling confederation of collected resentments, or an unwieldy conglomeration of self-negating orthodoxies, or an atonal choir of rabid complaint, or a cargo cult of quasi-religious politics and quasi-political religion, or simply the deafening abandoned YAWP of our bitter national Id. But they are not a political party because they have rendered themselves incapable of politics.

  • 9
    Hamis Hill
    Posted Friday, 28 December 2012 at 8:11 pm | Permalink

    Yes, never forgetting that Liberals in Australia have always been a franchise of the US Republicans.
    Given that they spent the Whitlam years touring the States, breathlessly informing one and all that a communist coup had taken place in Australia.
    The late Frank Devine had an article published in 1996 titled “Vatican in Van of New Cold War”, following the collapse of communism.
    Those who Devine quoted predicted that the secular US with its “Idolatry of Self” would be the next target for the Catholic Church after “its” victory over godless communism.
    Somehow this war of the 21st century collapdsed with the breaking of the world-wide pervert priest scandal.
    Nevertheless, Gerard Henderson, in his article “How Menzies Child Has Changed” described the rising influence of B A Santamaria proteges in the Liberal Party.
    Seems like the rise of Abbott has been long planned.
    Now shouldn’t those truth in advertising laws apply to political parties, now that “Menzies Child” has indeed changed?
    As the Ryans and Santorums in The States indicate, a certain, foreign, religious minority ( which likes to have its own schools , hospitals and universities, as well as an unaccountable clergy) does not quibble about destroying democracy and secularism with economic vandalism.
    It pays to remember that this crew provided the medieval, Totaltarian model for Communism and Fascism.
    Nah, she’ll be right mate! Just Sh-t all over the sacrifices of every WWII soldier, sailor and airman and women, by ignoring the lessons of history.
    It used to be Kruschev who wanted to bury The West and rise from the Ashes.
    Democracy and economic security? Collateral damage.
    Not the Abbott way? Is the coming Abbott Recession an actual policy? To destroy secular Australia and the Idolatry of self? Politico-religious dementoids’ll put the fear of god inta ya! Ya bunch of communists!

  • 10
    Hamis Hill
    Posted Friday, 28 December 2012 at 8:17 pm | Permalink

    Frank Devine’s “Vatican In Van of New Cold War” and Gerard Henderson’s “How Menzies Child Has Changed” inform the policies of a certain, foreign religious minority.

  • 11
    Hamis Hill
    Posted Friday, 28 December 2012 at 8:18 pm | Permalink

    Censorship Crikey?

  • 12
    Hamis Hill
    Posted Friday, 28 December 2012 at 8:22 pm | Permalink

    Frank Devine, Gerard Henderson

  • 13
    Hamis Hill
    Posted Friday, 28 December 2012 at 8:22 pm | Permalink

    Beyond Pathos.

  • 14
    Hamis Hill
    Posted Friday, 28 December 2012 at 8:29 pm | Permalink

    gianni, that Charles Pierce quote just as easil y describes the Coalition.

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