Since the economic downturn in 2008, the U.S. Federal Reserve has been helping the market with stimulus that is injected into the open market each month. More recently, the Federal Reserve and Ben Bernanke have created a monetary policy called quantitative easing. This policy injects money into mortgage backed securities, with QE3 allocating an additional $50 billion per month into MBS.
Now that 2013 is fast approaching, the theory of a Fiscal Cliff is emerging. The start of the new year will mark the reduction in the budget deficit, tax increases and spending cuts. Many economists including Michael Aneiro, a blogger for Barron’s, believes investors are sitting on this cliff unsure of what the actual effects will be. Hedge fund and investment managers have stated to their clients, accounts should be liquidated in order to prepare for the implementations of new policies if President Obama is re-elected.
Not only will this potential cliff have an effect on investments into the financial markets from within the U.S., but it is also believed the cliff will have an impact on the U.S. dollar; therefore, foreign investments have also slowed in the last month. The total effect of the cliff will be anyone’s guess.