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By Jason Stipp and Jeremy Glaser | 11-30-2012 04:00 PM

A Sanity Check for Fiscal Cliff Watchers

We outline some big takeaways, likely outcomes, improbable outliers, and prudent strategies for investors anxiously following the fiscal cliff drama.

Jason Stipp: I'm Jason Stipp for Morningstar. As the fiscal cliff drama continues to unfold with alternating optimism and pessimism in the headlines, we're hoping to bring some sense and sanity to the news for investors. Joining me today is Morningstar market's editor, Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: Jason, happy to be here.

Stipp: So we got some important news this week on this on this ongoing so-called fiscal cliff drama. Can you just break down the major points that we learned from the last few days?

Glaser: It really has been a drama. Certainly, both sides are trying to kind of play up as much as possible, kind of the importance of this and play up to their basis. And I think we certainly saw that this week. The president came out with the first kind of concrete proposal, offering that he wanted to raise revenue about by $1.6 trillion to restore or to keep the payroll tax cut; extend unemployment benefits; have some infrastructure spending programs; really not worry about too much of entitlement reform right now; and also get rid of Congress' ability to raise the debt ceiling and give that power to the administration.

I think this definitely represents the high watermark of exactly what the administration wants. I don't think they think that this is something the Republicans would accept. The Republicans have already said and rejected this proposal outright. I think it's really just the kind of opening part of this negotiation, and it's going to take a while before we kind of get to the outline of a deal that we think we already know.

The Republicans have said that they are willing to accept about half that much in new revenue, about $800 million. Certainly there's lot of discussion about if that's going to come from higher rates, if it's going to come from lower deductions. They don’t know exactly the best way to get it, but they do seem open to raising that revenue, which is something that was not the case a few years ago when we were having these discussions before.

There's also a sense from the Democrats that they are willing to make maybe deeper cuts to entitlements than they would like ideally and are willing to make some spending cuts to kind of bring the two sides closer together. So certainly, I think there's still room for agreement. I think that just because this first offer was kind of rejected out of hand, it doesn't mean that subsequent offers won't get closer to something they can come together on, but it's not going to happen without a lot of drama.

Neither side wants to be seen as totally giving in. President Obama took a lot of flak for extending all the tax cuts before instead of letting all of them expire, or only letting them expire for high earners. The Republicans don't want to be seen from their base of having agreed to raising taxes or having agreed to unpopular measures. So I think we're going to hear just a lot of noise. But certainly, they still seem to be moving down this path toward that basic outlay of agreement that we saw coming together in the last few weeks.

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