I think all of us have been operating under the logical assumption that politicians want to do the right thing, meaning what is best for the country and our economy. But the more I think about it, and the more I read about the responses from both democrats and republicans, the more it seems that they may want to have us go over the fiscal cliff. My reasoning is this: Both sides may believe that by holding out, and thereby forcing us over the fiscal cliff, they can blame the resulting negative consequences on the other side. For example, the republicans could say, hey, we offered a package with tax savings (increased revenues) and spending cuts, but the democrats refused to compromise, so it’s their fault. The democrats can say, hey, we offered tax increases that would result in $1.4 trillion in new revenue, but the republicans wouldn’t budge on raising taxes on the wealthiest 2%, so it’s their fault.
The reality will be that it will be the fault of both sides if they can’t compromise, but if there are no real consequences for these politicians, meaning that they are not under threat of losing their seats or campaign contributions, etc., there is no real disincentive for them to delay. Anyone that doubts the possibility of this happening need only look back to last year’s debt ceiling debates, through which the government essentially shut down due to lack of funding (we ran up against he debt ceiling, so there was no more money for the government to pay its bills). Stocks tumbled 30% as a result and the U.S. lost its AAA sovereign debt rating. Did politicians care? Obviously not because they are taking us down the very same road today.
With this in mind, I think it is highly likely (more likely) that there will be no agreement before the end of this year, which is only 17 days away. The consequences are pretty dire – I would certainly expect the stock market to tank – so investors should plan for the worst.