In addition to the economic slowdown, the continued housing crisis, the endless turmoil in Europe and the deceleration in China and India, we are moving closer to the period where the so-called 'fiscal cliff' will become more of a threat to the market. The fiscal cliff refers to the near-simultaneous January 2013 expiration of the Bush tax cuts, the payroll tax cuts, emergency unemployment benefits and the sequester established in last summer's debt limit agreement. Various estimates have indicated that the hit to GDP could be as high as 4%. Many on Wall Street dismiss these concerns on the grounds that Congress and the administration will simply extend everything and, once again, 'kick the can down the road'. That may eventually happen, but it won't be easy.
Various members of the Federal Reserve Board, including the Chairman, have been concerned enough to make their worries publically known. Bernanke, at his last press conference, said that the size of the fiscal cliff was so large that "I think there's absolutely no chance that the Federal Reserve could or would have any ability whatsoever to offset the effect on the economy".[More]
