This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

What's This 'Fiscal Cliff' Anyway? Do I Need to Worry?

By Jeff Cox, Senior Writer

NEW YORK ( CNBC) - " Fiscal Cliff" is a term you'll be hearing much more often between now and the end of the year. That's when a half-trillion dollars worth of tax cuts and spending boosts go by the wayside, possibly dragging the U.S. economy into the abyss of another recession.

That, however, is the worst-case scenario.

A more likely outcome, according to those who have studied the issue closely, is that Washington officials come up with a way to extend many of the items in question before automatic tax increases and spending cuts kick in that could choke the life out of the already-stumbling recovery.

Global policy makers have done it during the financial crisis of 2008, the U.S. budget imbroglio in 2011, and throughout the European sovereign debt disaster.
More from CNBC
For Occupy Wall Street, Rain, Crowds and Career Advice
The Six Pack: Beer Buzz of the Week
Huge 'Avengers' Debut Kicks Off Summer Movie Season

For the fiscal cliff, there are four main items at issue: Expiration of the Bush tax cuts; the end of the 2% payroll tax holiday; extended unemployment compensation coming to a close; and the automatic spending and budget cuts mandated by the Budget Control Act if Congress fails to reach its Supercommittee's deficit reduction goals.

All told, the damage would amount to $500 billion, or some 3.8% of gross domestic product, at a time when GDP is struggling to grow by 2%.

While it all sounds pretty scary on the surface, in practice it's unlikely that anyone in Washington will be content to sit by and allow another deep recession to hit.

"We do not see the doomsday scenario playing out: policymakers are unlikely to drive the US economy off the fiscal cliff," JPMorgan Chase (JPM) economist Michael Feroli said in an analysis. "Nonetheless, fiscal policy will continue to be a drag on the economy next year."

For a firm that does not believe the worst of the cliff scenario will come to pass, JPM has done extensive analysis of its ramifications.

The conclusion: While the markets may rattle and roll over the doomsday scenarios, the end result will be a buying opportunity.

"We anticipate the market will show a smaller-amplitude reaction to the political drama developing around the US fiscal cliff," said Thomas J. Lee, JPMorgan's chief market strategist. "The fiscal cliff is enormous...but there is sufficient common ground to expect much of this to be delayed."
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $94.32 0.73%
FB $117.90 -0.57%
GOOG $694.95 -0.47%
TSLA $234.00 -3.20%
YHOO $36.01 -1.40%


Chart of I:DJI
DOW 17,693.14 -198.02 -1.11%
S&P 500 2,058.37 -23.06 -1.11%
NASDAQ 4,758.8160 -58.7780 -1.22%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs