In February 2012, Ben Bernanke, the chairman of the Federal Reserve Board, testified in front of the House Financial Services Committee about monetary policy and the U.S. economy. It was during this hearing that the term “Fiscal Cliff” was born. During the hearing, Bernanke warned of the coming of the date January 1, 2013:

"Achieving long-run sustainability and providing comfort to the public and the markets that deficits will come under control over a period of time - that's very important for confidence and for creating more support for the recovery. But at the same time, I think you also have to protect the recovery in the near term. Under current law, on January 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date."

It’s on this date that the Bush-era tax cuts expire, in conjunction with automatic spending cuts. The spending cuts originate from last year's Budget Control Act of 2011, the act that was passed as a compromise to raising the debt ceiling last year. 

The combined effect of the spending cuts resulting from this Budget Control Act and the tax increases resulting from the expiration of the Bush tax cuts creates the imagery of a fiscal cliff—which we are set to fall off, come January 1, 2013...

...Unless legislation is passed between now and then to stop that from happening. 

Going off the fiscal cliff would take about 500 billion out of the economy all at once. This poorly timed reduction in investment spending has the potential to stifle recovery and send the economy back into a recession. 

This is why the "Fiscal Cliff" is a big deal.

The trick is to find a balance—a responsible balance between long-term deficit control and short-term investment. 

Stay tuned for more analysis on the Fiscal Cliff and what we can do to avoid it.

 

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