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Bank of America Merrill Lynch has a lengthy note out today depicting the play-by-play of how the so-called “fiscal cliff” issue is likely to be resolved.To recap: many believe that were the Bush tax cuts and President Obama’s stimulus programs allowed to expire at the end of this year, GDP could get creamed by up to 5 per cent points.
However, BAML believes that scenario is fairly unlikely.
“If the partisan gap is so large, why don’t you assume the “Thelma and Louise” outcome where we sail over the cliff?:”
Fortunately, we think politicians’ bark is worse than their bite. Faced with a weak economy and financial markets, we would expect both sides to eventually capitulate. We have seen this repeatedly. Obama “blinked” around the first Bush tax cut extension. Republicans “blinked” around the extended payroll tax cut and unemployment benefits. The result could still be suboptimal, and the process is awful, but we don’t expect the worst. A reasonable range of the resulting fiscal drag this time could be between 1 and more than 3% of GDP.”