Knowledge Center Archive


Will the U.S. Jump Off the “Fiscal Cliff”?

By James R. Solloway, CFA, Managing Director, Senior Portfolio Manager

Large spending cuts and tax increases set to kick in on January 1, 2013 could be detrimental to the U.S economy. SEI believes U.S. legislators will find a way to avoid the worst-case scenario. It will not be possible to make intelligent, high-probability forecasts regarding how they will do so until after the November elections. In the meantime, political posturing will rattle the financial markets and frustrate investors.

“Under current law, on January 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases,” Federal Reserve Chairman Ben Bernanke recently told the House Financial Services Committee. The media and various pundits have been using the quote as a mantra to herald the arrival of a financial apocalypse in the U.S.

The fiscal cliff to which Bernanke refers is comprised of three distinct items:

  • Sun-setting of Bush-era tax rates;
  • Expiration of Obama-era stimulus measures;
  • Implementation of across-the-board spending cuts (the so-called sequester under the debt ceiling agreement of 2011).

SEI believes investors would be better served if legislators focused on the little-mentioned second part of Bernanke’s quote, in which he stated, “I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date." We suspect January 1 will herald the arrival of neither a financial apocalypse nor long-run fiscal improvement for U.S. investors.

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Will the U.S. Jump Off the “Fiscal Cliff”?

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