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What is the US Fiscal Cliff?

EconomicsEdward KiledjianComment

Read any newspaper, watch any newscast or listen to any economics radio show and you will hear the term fiscal cliff over and over (even outside of the US). Many of my non US readers may be wondering, what is this cliff and why is everyone so excited about it.

What is the fiscal cliff

The fiscal cliff is a new term to describe a confluence of events that will occur at the end of 2012 unless US elected officials can come to a financial agreement and change course. In simple terms, it is the end of the George Bush tax cuts (he implemented almost 10 years ago) and the automatic activation of many US Government budget cuts. The fear is that raising taxes and cutting government spending may push world economies back into a recession.

If there is a will, there is a way to avoid this so called cliff but a majority of politicians will have to agree on a bipartisan fiscal package. Republicans want low taxes and low government spending. Democrats want higher taxes so the government can do more spending. It will be interesting to see if 2 diametrically opposed positions like this can be reconciled in less than 40 days.

A game of chicken

There are politicians on both sides of the isle that are actually advocating a do nothing approach. They believe if they hold steady the other side will eventually panic and cave in. This may work but it is a strategy where there can be no plan B.

Hopefully calm and collected thought will prevail and a mutually agreeable solution will be reached before year end.