Is Obama’s cliff-top stand such a drama?

FS Adam Lewis 160 byline

It cannot failed to have escaped most readers attention that a fairly important election took place the other side of the pond last week. Within hours of the announcement that Obama had won a second term of Presidency the press releases started flying in regarding the likely impact on markets and what the win will mean for the health of the US economy.

It seems markets could have done anything on Wednesday last week and it would have been directly linked to the US election. Many ignored the real likely drag on the American indexes the morning after was the result of awful numbers from German manufacturers rather than the direct effect of Romney not getting in.

It is clear though that as the dust settles the problem of tackling the so-called fiscal cliff is an immediate priority, the longer a lack of solution drags out, the more jittery global markets will become.

But how? Despite most exit polls showing that voters felt the US economy was on the wrong track, Obama did enough to convince them to give him another four years to sort it out. Indeed they even gained seats in the Senate. However the problem for Obama is the Republicans still retain control of the House and last week they wasted no time saying they remain opposed to any rise in tax rates

So as US economist Paul Krugman wrote in last week’s New York Times, Obama has a decision to face; bow to what he calls “economic blackmail” and make a deal with the GOP or stand his ground and face the consequences of the US falling over the cliff and possibly re-entering recession. Krugman unequivocally argues for the latter. His argument is that no deal is better than a bad deal and that s statement would hurt Republican backers just as much as it would the economy.

The fiscal cliff seems to be the thing to discuss when it comes to the US economy but unlike the debt ceiling Krugman seems more sanguine than the majority, arguing nothing “very bad” will happen if an agreement is not reached until a few weeks or even a few months into 2013, meaning in his words “there is still time to bargain”.

Others could well disagree but look out for a number of cliff analogies in the weeks and months to come.