Chances That The US Will Plummet Off The Fiscal Cliff

grand canyon fallMany people have heard about the fiscal cliff and the devastating toll it will take on our economy if we in fact go over the edge. Because of tax adjustments, people will make about 4% less, business will lay thousands of people off, consumers will stop spending money, home short sales will cease to exist, etc.

Watching CNBC, you would think the end of the world was coming. When a Republican speaks and blames the other party for not negotiating, the market proceeds to tank. When a Democrat accuses the Republican party of the same, the market sells off again. When both parties shut their mouths, we actually see positive gains in all of the indices. For the last several weeks, the market has been a victim of politics, regardless of which side is taken.

Intrade’s probability odds

After the 2012 presidential election, I’ve had a tendency not to listen to the news sites. Well, I listen, but with scepticism. Polls predicted that Obama would barely squeeze out a victory in the battleground states, edging past Romney by fractions of a point. As we now know, that’s not what happened. Shortly before the election, I wrote about Intrade and the fact that the “betting” odds were drastically pointing towards an Obama victory.

When it came to the fiscal cliff, naturally I tried to use the same methodology by glimpsing into the crystal ball of Intrade. Visiting the site, I wasn’t able to find any mention of the fiscal cliff on the home page. I then proceeded to check the politics section. Hmm, nothing there. It must be listed under business – after all, I’ve watched countless hours of coverage on CNBC. Well, nothing. As I clicked on the last possible category, I realized that there is no mention of the fiscal cliff – the most important factor facing our economy at present.

The lack of fiscal cliff action can be explained by two things:

The business channels and news sources could be blowing everything out of proportion for the sake of ratings. How can this be the case though? We know that every person will take home less if we go over the cliff. Because of tax increases and the expiration of certain tax breaks, the average American will bring in about 3.8% less in 2013. That seems like a pretty big deal to me, so maybe the emphasis on the cliff is warranted.

The other explanation is that most people simply aren’t aware of what’s going on around them. According to recent polls, 60% of those asked have no idea what the fiscal cliff is or what will happen if the government doesn’t agree on a deal by the end of the year. These people will be completely blind-sided when their after-tax pay is lower next year.

1958 recessionRecession chances

The most relevant fiscal cliff bet that I could locate on Intrade is whether or not the US Economy will go into a recession in 2013. Many economists believe that our economy will produce negative GDP levels if we do in fact plummet off of the cliff and remain so for an extended period of time. Based on the current percentages, most betters do not think that we will go into a recession.

intrade recession chart

Recent quotes from both sides

Harry Reid (Senate Majority Leader) on 12/12:  It will be “extremely difficult” to get a deal done to avert the “fiscal cliff” by Christmas.

John Boehner (House Speaker) on 12/12:  “The longer the White House slow-walks this process, the closer our economy gets to the cliff.”

READERS:  What do you think the odds are that we will go over the cliff? If we do, who would you place more blame on – Obama, Republicans or Democrats?

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Comments

  1. Well, it’s Dec 28 now and still no deal. I do worry that our economy will backtrack if a deal isn’t made and we’ll lose the little momentum 2012 brought. I do think both sides need to compromise at $500k. That’s right in the middle. Why should the middle class suffer because of both parties not doing what the people want. Just my opinion though.

  2. I’ll go out on a limb and say we have zero chance of a recession in 2013. Let’s see if I can back that up.

    1. The economic cycle has a life of its own and as long as it’s been tracked (like around 200 years or so) it seemingly always went up after it went down and down after it went up. And in that long time the lapse between bottoms has almost never been less than 5 years. Most often it’s between 7 and 10 years. The last bottom was 2009, and so I don’t expect another one till around 2016 or so.

    The economic cycle has defied political parties, presidents and almost everything else. When I look around me I see so many signs of recovery. Home prices, job creation, almost everything touching daily lives. The recovery might not be overwhelmingly strong, but it’s very broad. And the broader it is, the less likely it is to be derailed by a single event.

    2. Then there’s the Fed’s policy of Quantitative Easing, which just pumps money in no matter what. It’s hard for a fire to go out with so much gasoline being thrown on it.

    3. As for the fiscal cliff, there are too many rich people who will get hurt while the issue is not resolved. These are the people who buy lobbyists, who in turn buy Congress. So if it’s in their best interests to get a resolution, any resolution, then a resolution is what we will get. As usual, nobody will be happy with it, but we will get one.

    And life (including the recovery) will go on. We can see next year how this turned out.

    5. The supermarket press thrives on negative news, and we all know it. (No news is good news, and good news is no news.) The financial media are media first, financial second. They don’t make money being right. They make money being listened to. And if negative predictions cause more listening (which evidently it does) then negative news is what we’ll keep getting. Just sayin’…..

    When I look at all of that, I can’t help but believe we’re in much better shape than the press would have us believe.

    • Makes sense to me. I often also wonder how much “fear” the media is trying to use. They over exaggerate everything. Just like you said, our economy continues to survive and everything else rotates in and out. The economy may lose some ground but it’ll eventually recover. Very insightful comment! Thanks!

    • I completely agree with you William. The economy is not growing as fast as we would all like, but it is recovering none the less. Unemployment is slowly dropping, housing is on the road to recovery and most major events (election, fiscal cliff) are behind us. Something completely unknown and unexpected could bring our economy down again, but there’s no point trying to predict those type of events.

      The news outlets are all about readers/viewers and people are interested in dramatic events. CNBC backed up your statements recently in a segment they called “Battle of the Titans”. They allowed Icahn and Ackman to argue with each other for well over ten minutes on the topic of Herblife. Was this informative for viewers? No. It was very entertaining though.

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