Much of the coverage today is about the difficulties facing the fiscal cliff negotiations. These stories suggest that I may have been premature in thinking the Republicans had fought their own civil war to completion. Although the House Republicans did indeed offer a compromise plan, and the leadership did indeed sign on, the battle still seems to be under way.

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Volatility in financial markets

Apparently, Obama’s demand that the Republicans come up with a plan had some effect—they did. Not surprisingly, the offer includes much less new revenue than the White House proposal and much larger spending cuts. The New York Times has a pretty good graphic today on page A16 that compares the initial offers.

A few interesting points:

For the past couple of weeks, I have been writing about how I think, ultimately, we will not go over the fiscal cliff. I have based my views on the need for both parties—for their own good and for the good of the country—to actually compromise and solve the problem.

And the need for some sort of deal is increasingly apparent, as I believe, based on the facts at hand, that the damage done to the economy may be well in excess of the 4 percent of GDP that the actual tax increases and spending cuts amount to. About two-thirds of that 4 percent is made up of tax increases; the rest is spending cuts. Economic studies have shown that the multiplier for tax increases is between 2 and 3, while that of spending cuts is between 1 and 2. Combined, using a multiplier of 2.5 for the tax increases and 1.5 for the spending cuts, we might reasonably assume a 7-percent to 8-percent hit to GDP.

Sort of. The White House has made an initial fiscal cliff proposal, which the Republicans have rejected out of hand. The headlines are portraying the Republican dismissal of the proposal as a problem, but the markets seem to be taking it in stride. I suspect the markets are right on this one.

Slowly, slowly we move forward. Economic growth for the third quarter was revised upward to 2.7 percent, well above the initial estimate of 2.0 percent, but slightly below the expected revision of 2.8 percent. This is a good result, but it probably will weaken in the next quarter, as quite a bit of it was due to inventory buildup, which will be drawn down.

Kind of an interesting day, with some good news in the U.S. and a mix of good and bad about equally balanced in Europe. Let’s take one at a time.

The U.S. economy: Housing continues to perform strongly, with house prices up for six months in a row by an average of 3 percent over the past year. Even the worst-hit cities, such as Las Vegas, Phoenix, and even Detroit, have shown price gains. The continued strength in housing hit the front page of the Financial Times (FT) and A3 in the Wall Street Journal (WSJ), and it is a key part of the front-page New York Times (NYT) article, “California Finds Economic Gloom Starting to Lift.” California is often a leading indicator of the rest of the country, so this is particularly good news.

I have been getting a number of questions recently about a number of e-mails and webpages that predict certain disaster. The scenarios include a collapse of the dollar, hyperinflation, confiscation of private retirement accounts, and many other similar things.

The fiscal cliff debate has shifted to some interesting ground. After a good start, with both sides sitting down and announcing that a deal was doable, there has been little visible action between the parties. There has, however, been quite a bit of activity within each party.