Once again, the papers lead with the fiscal cliff: “Pressure Rises on Fiscal Crisis” from the front page of the Wall Street Journal, “Congress Sees Rising Urgency on Fiscal Deal” from the New York Times, and “Schumer appeals to business on the fiscal cliff” in the Financial Times.

The good news is that everyone gets it, and both parties seem to feel a sense of urgency in dealing with this. Speaker Boehner has gone on record saying that additional revenue could be doable—which might be a concession, or might not. The President has been quoted saying he doesn’t think we will go off the cliff, but he hasn’t said why not.

Wow, that was quick. The markets celebrated Obama’s reelection with a quick drop as investors shifted their focus to the problems in Europe and the fiscal cliff here in the U.S. All three papers headlined with the fiscal cliff in one way or another this morning. The Wall Street Journal and New York Times (NYT) addressed it explicitly, with “Focus Moves to ‘Fiscal Cliff’” and “Back to Work: Obama Greeted by Looming Fiscal Crisis,” respectively, while the Financial Times (FT) caught up on the election with “Obama wins but new battle looms.”

Yesterday’s market dip was significant, the largest of the year in both points and percentage for the Dow. It also took the market below psychologically significant breakpoints, at 13,000 for the Dow and 1,400 for the S&P 500, and put it closer to its 200-day moving average—another potentially important breakpoint. Now that we’re past the election, the market is focusing on the next set of challenges, and it doesn’t much like what it sees.

You’re likely aware that the fiscal cliff refers to the package of tax increases and spending cuts scheduled to take effect, absent Congressional action, at year-end. The chart illustrates the various components included in the fiscal cliff; each one would be significant on its own, but taken together, they could prove disastrous for the economy.

Financial markets react to uncertainty

As the election nears, and the race remains tight, I think it’s appropriate to consider what both candidates would mean for various issues. Taxes are certainly one of the most prominent areas of debate, so let’s take a look at both candidates’ proposals and their potential consequences.

Of course, neither candidate has been very forthcoming about what, exactly, he plans to do. We therefore have to make some guesses and inferences about what their general assertions and varied proposals really mean. Another problem is that whatever is proposed by the White House, from either side, must be passed by Congress, which looks likely to be divided again between the Democrats and the Republicans. So, any analysis of the new president’s plans may not be a good guide to what actually happens.

Another day for optimism, I guess, as several good economic reports showed up over the past couple of days.

A friend recently forwarded me an e-mail to comment on. This friend is a very intelligent and informed woman, but the e-mail had raised concerns that she wanted addressed.

In the past couple of weeks, I have given several talks to groups of clients, and there have been a couple of common questions and themes in the discussions. The most popular theme is employment—when and whether we will be able to get back to an economy that provides good jobs for lower- and middle-class workers that allow them to buy homes and live a good life. This is really the key question for everyone who loves this country.

The answer I have been giving is that we are not going back to the 1950s. At that time, America was the workshop of the world—because most of the rest of the developed world had destroyed itself. Europe was in ruins, Japan was worse, and the rest of the world had never industrialized. We could sell everything we made because we had no competition. In fact, our policy was to build up the other areas of the world again.

As a follow-up to yesterday’s post on inflation, I wanted to add some interesting charts prepared by Pete Essele, who has contributed before. As you can see in the first chart below, there appears to be a lag between the blue line, which is food and energy inflation, and the red line, which is the core rate for everything else.

The U.S. consumer represents approximately two-thirds of the total economy, so what he or she does matters to everyone. The paradox of thrift is particularly relevant here, in that the less consumers spend and the more they save, the slower the economy grows. We need to delever—and that is happening, but not too fast.

In that light, the recent September retail sales report indicated an increase of 1.1 percent, which was higher than expected. The overall figure had to be revised down a bit for one-time factors, such as the release of the iPhone 5, but it still was a very strong result.