The bipartisan Group of Eight senators are already working on a legislative framework that would offset some of the automatic defense cuts, patch the alternative minimum tax, prevent a 25%-30% reduction in Medicare and extend the debt ceiling. This would provide the president and the Congress some breathing room in order to develop some legislation aimed at reducing the federal deficit. In opposition will be a more conservative House of Representative, who will not easily abandon the Ryan plan, which seeks to reduce long-term mandatory spending and preserve the Bush tax cuts.
It is said that our leaders rise during crisis. Though they didn't rise -- in fact, they fell -- in last August's debt negotiations, the variant view is that our politicians have learned a lesson. And as I have conjectured, I am more optimistic (or maybe more hopeful) that, at least for the time being, the hatchet might be buried somewhat and more sensible and constructive discussions could be chosen over partisan ones.
In conclusion, some fiscal drag should be expected next year, but, if the election is not a cliffhanger, the fiscal cliff may not be quite the fall that I (and others) might have feared it would be.
Geopolitical Cliff Ebbing
It appears that the risk of an air strike by Israel on Iran's nuclear facilities has been recently reduced. Sanctions have already hurt Iran's economy. Social unrest has accompanied rapid inflation and a currency that has depreciated by nearly 50%.
Political change appears imminent, and the current leaders of the Iranian government even appear to be willing to engage in discussions possibly aimed to negotiate a pullback in its nuclear program. The last thing on Iran's agenda may be a nuclear bomb. Some have even speculated that the country is no closer to being able to produce a nuclear bomb than two years ago. Meanwhile, the rulers of some of Iran's allies (e.g., Syria) are under siege and are increasingly isolated in the face their own domestic issues.
But the Earnings Cliff Remains
I remain concerned about the prospects for U.S. corporate profits, but one out of four cliffs ain't bad.