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The Looming Fiscal Cliff

NEW YORK ( TheStreet) -- I've not thought much about the "fiscal cliff," because I thought Washington wouldn't dare risk shooting the U.S. economy so unnecessarily in the foot. I imagined that long standing and dogmatic yammering of positions from both sides of the aisle were mere political rhetoric in an election year.

Now I'm not so sure.

The "fiscal cliff" -- the name for automatic spending cuts and the repeal of tax cuts that are set to take place at the end of the year if nothing is agreed -- looks far more likely an outcome than it did even a few weeks ago and would be a disaster for the stock markets as well as our economy.

The fading hope is that an agreement, or at least another compromise that puts off a full budgetary restructuring deal, can be found before the end of 2012 -- a presidential election year.

Surprisingly, that seems less and less likely particularly from the recent comments of Democrats, who have begun to talk about the fiscal cliff as an acceptable outcome -- see the recent writings of former Joe Biden adviser Jared Bernstein and former DNC Chairman and Vermont Governor Howard Dean.

This is some dangerous talk, even if the Democrats are playing some crazy game of economic chicken. The last time we saw both parties point their cars at each other and step on the gas, we got a last-minute deal on the debt limit and a downgrade of U.S. Treasuries -- lovely.

This time, there is a political argument that the Republicans are equally happy about seeing this disaster unfold: The prospect of capital gains taxes increasing threefold without a deal before the end of the year would precipitate the largest "tax-profit" selling spree of stocks ever seen, dropping the indices at least 10% to 15%, in my view.

Such a drop in the stock market would be a strong argument for the GOP that even the stock market is confirming a failed economic policy of the sitting president.

The question becomes: When does the investing public decide that not even a short-term deal is likely coming? When do they begin to lock in gains that they will pay 15% on instead of a possible 39.6%?
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