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Fiscal Cliffhanging Causes National Nervous Breakdown

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Many economists are warning about the possible psychological scars left by the cliff, not the relatively straightforward cash flow issues that Democrats and Republicans must reconcile before the start of next year.

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Paging Dr. Freud! The fiscal cliff has the country in need of some serious therapy - and maybe a Xanax or two.

Many economists are warning about the possible psychological scars left by the cliff, not the relatively straightforward cash flow issues that Democrats and Republicans must reconcile before the start of next year.

Beneath the debate about potential tax hikes and spending cuts, there lurks fear, paralysis, wild optimism, and basic questions of trust. The country already views government leaders with skepticism, a feeling that could become even more pronounced if the fiscal cliff talks fail.

"Much like the finale in some kind of horror movie, you know something big is about to happen and are just waiting to see what," said Stanford University economics professor Nick Bloom.

The game inside the White House negotiations involves tough budgetary math. But for the investors and consumers without a seat at the table, it is a matter of debilitating suspense. Stocks rally on canned statements by congressional leaders that sound positive. Upper-income Americans spend less in anticipation of higher taxes. It's openly speculated whether film legend George Lucas sold off the Star Wars franchise to avoid higher taxes - and which other billionaires might follow suit.

Along with two other economists, Bloom developed the policy uncertainty index to gauge the financial impact of escalating political tensions. The daily index has steadily climbed over the previous three months, dipping only after House Speaker John Boehner, R-Ohio, and other congressional leaders emerged from the White House on November 16 to call the initial discussions with President Obama "constructive."

The index currently stands at an elevated 180, its increase tracking with alarmist quotes from CEOs about the cliff and a slowdown in business investment. But that reading remains below the critical 230 level reached last year during the debt ceiling negotiations, when the government nearly defaulted and economists actively warned of an oncoming recession.

Surprisingly, Americans care more about federal spreadsheets than scandalous bed sheets. The fiscal cliff has generated more interest than the juicy extramarital affair involving former CIA director and retired Army Gen. David Petraeus, according to a survey by the Pew Research Center for the People & the Press.

As the details of any bargain get sorted out, some of the usual partisan bile will start pumping. Republicans have historically resisted the tax increases being pushed by Democrats, who in turn oppose the dramatic overhaul of entitlement spending that would likely be part of any deal. The celebrating overly friendly tones will give way to sharp doubts, which should take stocks on a volatile ride.

"Despite last week's kumbaya moment, I'm still expecting to see brinksmanship, posturing, statements to keep the base intact, I expect to see some real conflict and the market is not going to like that," said Jerry Webman, chief economist for Oppenheimer Funds.

Administration and congressional officials are deeply aware about the role played by animal spirits in the economy. Alan Krueger, the president's top economics adviser, recently voiced his concerns about the breach of public trust if negotiations disappoint.
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