The key detailsSo far, the fiscal cliff standoff has been surprisingly short on new rhetoric, let alone action. Think of this as the opening moments of a boxing match, when the fighters circle each other looking for an opening. As you wait for developments to begin, here is a quick guide to watching the fiscal cliff negotiations:
- Don't read the rumors. The politicians involved are well aware that this is a spectator sport. They will make statements designed to influence public opinion, and leak information to make themselves look good. Just remember that until a deal is done, any public statements or rumors are just smoke and mirrors.
- Think of the financial markets as a hammer. The stock market has had some crazy days lately as it tries to anticipate the outcome of the fiscal cliff negotiations: down more than 300 points on November 7, down 185 points on November 14, then up more than 200 points on November 19. This kind of erratic behavior can be hard to watch -- especially the losses. It helps to remember that the financial markets act as a kind of hammer in these situations -- they pound home the message that there will be financial consequences to Washington's actions. This hammer is one of the few things politicians on both sides of the aisle pay attention to.
- Don't forget about the rest of the world. Important as the fiscal cliff is, there is an outbreak of hostilities in the Middle East, and continuing developments in the European financial crisis. In today's world, no event takes place in isolation.
- Realize that the deadline may not be such a deadline. January 1, 2013 is widely reported as the deadline for a solution, because that's when a package of tax increases and budget cuts would take effect if there is no further action. The truth is, that's not such a hard deadline. Tax breaks passed during the year can be made retroactive to the start of the year, and budget cuts phase in over an extended period of time. It turns out the fiscal cliff is more of a long downhill slope.
Ultimately, the yield on your savings account next year may reflect the tale of the fiscal cliff and the government's approach to avoiding it. If rates fall still further, it may be a sign that things didn't go especially well.