The last time I remember such widespread concern about a year-end event was in 1999, with the hysteria over "Y2K". As you probably remember, everyone was worried about a global meltdown of IT infrastructure when the calendar moved to the year 2000 due to a widespread software malfunction.
Of course, when midnight came on December 31, 1999, and we started the new year, here's what happened:
Nothing.
And so to this year's event.
The term "fiscal cliff" was apparently first introduced by Fed Chairman Ben Bernanke. Bernanke was discussing the expiration of the combination of tax increases and spending cuts that will occur on January 1, 2013, unless some sort of new budget agreement is reached by Congress and the President by year-end.
Note, however, that if no agreement is reached, the world doesn't necessarily come to an end. Yes, taxes will increase by about $500 billion, and spending cuts of around $100 billion will occur, which will obviously not help improve our fragile economy.
But, unlike the impending doom of Y2K, the economy will not suddenly stop in its tracks on January 1. Even the most bearish economists expect that the economic impact will be mostly a first quarter event.
So will it lead to a recession?
Well, maybe, but consider this commentary from an article titled "3 Reasons to Fade a Fiscal Cliff FreakOut" that appeared on Yahoo! Finance (I added the emphasis):
Michael Darda, chief market strategist at MKM Partners, points out that no U.S. recession in the past 100 years has occurred without the Federal Reserve constricting the money supply by either higher interest rates or other means.
Tighter money is certainly not an element of today's economy and won't likely be anytime soon, even though rates are already near zero.
There is also evidence that businesses have already been anticipating a potential slowdown due to nonproductive talks in Washington, and have curtailed spending on plant and equipment. This would mean some of the pain has been front-loaded, and if a palatable budget compromise is forged, it will uncork pent-up demand early next year. J.P. Morgan Chase & Co. (JPM) Chief Executive Jamie Dimon hinted at this prospect last week when he suggested "the economy can boom" if the fiscal issues are sufficiently addressed.
Like a steep rise in gasoline prices, the bump in payroll and income taxes would pressure spending across the economy and reduce its cushion against another descent into recession, but by no means would it guarantee one.
http://finance.yahoo.com/blogs/the-exchange/3-reasons-fade-fiscal-cliff-freak-162629219.html
Then there's this observation from David Weidner of the Wall Street Journal in a piece titled "Fiscal Cliff is More Hype Than Hazard" :
Really, though, Jan. 1 is simply a deadline set by the Budget Act of 2011.
Washington has a way of fudging deadlines. This particular one is an extension itself. Moreover, it is a deadline we have been aware of since a deal to lift the debt ceiling was struck near the end of 2011.
Malleable deadline and budget sequestration don't have that same sexy ring as fiscal cliff and don't fit nicely in most headlines.
But it is more than that. It is that the temptation to play into fears (and greed) has become too ingrained in the media.
As a result, investors are making decisions based on a tone that is built to grab attention, not inform.
It is almost as irresponsible as threatening a recession to further political interests.
http://online.wsj.com/article/SB10001424127887324595904578119651900466058.html?KEYWORDS=fiscal+cliff+hype
Finally, even though I find myself quoting Warren Buffett so much these days that I should probably send him a copyright check, he made a couple of comments in an interview on CNN yesterday that are so sensible that I can't resist reprinting them here.
First, to the fiscal cliff, Buffett said:
Buffett shrugged off the Congressional Budget Office's warnings that failure to address the fiscal cliff by Dec. 31 could lead to a recession. "We have a very resilient economy," he said. "The fact that [lawmakers] can't get along for the month of January is not going to torpedo the economy."
And to the hype that higher tax rates will cripple investment, Buffett said:
Buffett laughed off concerns that higher capital gains taxes could change how individuals invest in stocks or bonds. "Never in 60 years of managing money have I come up with an idea and had someone say 'I'd do it but the tax rates are too high'."
http://money.cnn.com/2012/11/14/investing/buffett-fiscal-cliff/index.html
In short, everyone needs to just take a deep breath, and "chill" a little.
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