Galloping toward the edge of the cliff

November 3, 2012 

In a week with millions of Americans coming to grips with a too-close-to-call election and the long road to recovery after Superstorm Sandy, a giant economic storm continues gathering strength. The United States is one week closer to the fiscal cliff that threatens jobs, investors and taxpayers.

So far, the stock market has shown great resiliency and confidence that the automatic tax increases and government spending cuts will be avoided before they're due to take effect in January. But recent experience shows it's the market that pushes politicians to act. As the fiscal cliff nears, markets will become more nervous.

In the summer of 2011 as the U.S. was approaching its borrowing limit, the S&P 500 dropped almost 7 percent in the week and a half leading up to the deal that raised the debt ceiling on the last day possible. At the height of the financial crisis, the index sank a heart-stopping 8.5 percent in a single day, the same day the House of Representatives rejected the first TARP bank bailout.

It was only after these violent market moves that Congress and the White House put solutions in place, even if they were temporary fixes. It's a bit like starting to exercise only after a heart attack: Yes, it's better than doing nothing, but some damage may be irreversible.

After the polls close and the balance of power on Capitol Hill and in the White House becomes clear, investors and consumers will become more nervous if there is little progress while the fiscal cliff nears.

Tom Hudson, anchor and managing editor of "Nightly Business Report," can be followed on Twitter HudsonNBR.

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