Nobody wants much to think about it yet, but it's well understood by everyone in Washington and on Wall Street, that a potentially massive fiscal problem is looming for the economy next year.Trying to figure out how it will shake down is especially difficult since it's an election year.
But in the worst case scenario we could have bracing austerity (tax hikes and spending cuts) coupled with another heart-stopping debt ceiling fight. Or we could have some kind of reversal of the spending cuts and a debt ceiling fight, and perhaps another downgrade from ratings agencies, another potential confidence blast.
Just in terms of the drag on growth, recent analysis by Barclays (according to BW) puts the hit at around 3% of GDP.
Furthermore, whereas in the last debt ceiling fight, Obama was eager to ensure that there would be no cuts in 2012 (an election year), it's not clear that he'd make the same bet this time, as a lame duck (if he wins, or even just in the lame duck session), as he's apparently open to the idea of seeing all the Bush tax cuts expire on everyone.
All this was already known.
You'll probably feel even worse about things after you read the latest cover story by Matt Bai in The New York Times Magazine on the failure of Obama and Boehner to strike a "Grand Bargain" in the summer of 2010..
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