The fiscal cliff is looming at the feet of government and the private sector. Over the next 7 weeks, as the epic stalemate continues in Washington, stocks on Wall Street will be in sell-off mode; way more than the normal end-of-year style sell-offs. That’s because if Republicans fail to get Obama to agree to extending the Bush tax cuts, long term capital investment taxes jump from 15% to standard income. For serious investors, that could be millions of dollars of difference between selling December 31st and January 1st.
In addition to this automatic tax increase we have budget cuts of irrational proportion – a piece of legislature passed with no real thought as a way of convincing Congress to try and come up with something better before before the end of 2012 will cut sizable chunks to a lot of government agencies as well as cut off cash to defense contractors. If this were to happen, unemployment will spike in Q1 of 2013.
So what would massive sell-off’s on Wall Street plus a spike in unemployment do to our economy in 2013? It’s going to hurt it – a lot. The United States would inevitably roll into another recession, probably not as bad as the previous recession, but a recession nonetheless. However, this recession is exactly what this country needs right now. Yes, the country will suffer for a lot of next year as a result, but let’s really think about the outcome. Wealthy investors will be stuck with a bunch of cash because of the sell-off’s, and a bunch of other people will be unemployed. What happens when you have lot’s of cash and lots of unemployed people? New jobs, obviously! The country will bounce back stronger and faster as a result of driving over the cliff.