Wednesday, December 19, 2012

The Explanation of Fiscal Cliff

A lot of news going on with the Fiscal Cliff in the United State for the pass month. Almost everyday there are news related to the Fiscal Cliff in major business and market news network.

But what exactly is Fiscal Cliff and how does it impact the market?

The term is used to describe what the US government will face at the end of December 2012 when a few laws are going to expired on 31st December 2012.

There is and end of certain business tax break, end of the temporary payroll tax cut, end of tax cut in year 2001 - 2003 and the beginning of certain taxes related to President Obama's health care law - Obamacare.

At the same time with all the tax rebate expired, there is a government spending cut agreed in the year 2011 will go into effect. More than 1000 government program will be in spending cut.

Consider all the above, the congress has a few options.

1. They allow all the laws to be in effect and allow it to weight heavily to growth of economic sending the country into recession but it will bring down the US deficit by 50%.

2. They could cancel some or all the tax scheduled to be in effect but it will further hurt the US deficit increasing the odd of US facing crisis like the Europe.

3. They can also go into middle ground where cancel certain tax and increase spending on certain items or exchange it with new laws. But this will weight moderately on growth.

The congress has to come down to a compromise to 1. keep US out of recession and 2. Reduce US deficit and avoid it from hitting the debt ceiling again as in year 2011. And the decision will decides what way the market goes (especially on financial stocks).

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