Hussman Weekly Market Comment: Brief Holiday Update

With Monday as the last opportunity for Congress to avoid some version of the “fiscal cliff,” there isn’t a great deal to say that will be relevant for long, but my impression remains that the most likely outcome is that fiscal policy will go over the “cliff” – if only for a week or so. The last Congressional Republican to vote for a tax increase was Pete Domenici in 1990. Whether one agrees with that position on taxes or not, it seems unlikely that House Republicans will violate their pledge to their own constituents and vote to raise taxes on December 31 – when precisely the same outcome can be obtained by voting a few days later to lower them immediately after they are automatically raised.

The House has already passed legislation that, if passed by the Senate, would avoid the fiscal cliff but wouldn’t raise taxes. That clearly isn’t acceptable to Democrats. A slightly modified proposal to raise taxes only on incomes above $1 million was pulled before a House vote, because even that tax increase was too objectionable to garner enough votes. So now, there’s some talk of the Senate passing a bill and sending it to the House, though this would seem to violate Article I Section 7 of the Constitution, which requires all bills for raising revenue to originate in the House. Then again, the Federal Reserve has repeatedly violated the Federal Reserve Act to encroach on the fiscal authority of the House in recent years (see The Case Against the Fed), so we shouldn’t rule out some novel interpretation of the law on this matter as well.

In any event, we shouldn’t be terribly surprised if we briefly go over the fiscal cliff. The real problem would be if there is significant difficulty in quickly passing legislation in early January, or if Congress merely passes an extension of existing law, which would result in a replay of the current situation – since some solution would still be required to avoid the need for the House to explicitly raise taxes.