By Bryan DooleySimilar to Sylvester Stallone’s character in the 1993 movie “Cliffhanger” who dangled nervously from a precipitous rock face in the Colorado Rocky Mountains, such is the predicament now facing the already teetering US economy, which is fast approaching a monumental raft of fiscal stimulus programmes scheduled to end abruptly early next year, potentially sending the world’s largest economy back into a recession.The American economy, lately recognised as the ‘cleanest dirty shirt’ among the world’s major developed countries had been demonstrating remarkable resilience earlier in the year even as Europe continued to be dragged down by the fiscally wayward Southern European countries.Meanwhile, Japan remains stuck in their two-decade long period of stagnation despite a modest reconstruction bounce following last year’s tragic natural disasters.Up until this spring in fact, the US economy seemed to have best potential to lead the world out of an impending growth slowdown even as the all-important Chinese economy likely faced a ‘growth recession’ after many years of annual double-digit Gross Domestic Product (GDP) advances.Over the past few months, however, a new undercurrent of scepticism is growing among top economists that the US will no longer be able to buck the trend. In addition to the European debt crisis which has already begun to crimp the revenues of US-based multinational companies, the impending fiscal cliff has created a rising level of political controversy threatening to put the brakes on private sector hiring and eerily reminiscent of last year’s heated political debate over America’s yawning budget deficit.Market followers will remember that last year’s escalating rift between the two main political parties pushed America to the brink of a bond default, prompting the first ever credit downgrade of US debt. In the end, last year’s great debate led to the formation of a congressional ‘supercommittee’ which mandated obligatory spending cuts if a bipartisan fiscal agreement was not met by the end of this year.With the November elections quickly approaching, political platforms are increasingly focused on the coming ‘cliff’ — with the stakes growing higher each day.Used broadly, the term ‘fiscal cliff’ refers to the entirety of the economic and political consequences facing the US next year when key tax breaks and spending programmes expire.Simply put, America has two choices: If US politicians do nothing, current policy stays in effect automatically resulting in a swath of tax increases in addition to supercommittee spending cuts. Or, alternatively, American legislators can come to an agreement which extends some or all of the scheduled tax breaks and agree to reduce or postpone the spending cuts, placing less pressure on the anaemic recovery but failing to begin reduce the exploding American budget deficit — at least in the short term.How we arrived at the edge of the cliff dates back to 2001, an earlier recessionary period which occurred in the aftermath of the bursting technology stock bubble. At that time, President George W. Bush passed the Economic Growth and Tax Relief Reconciliation Act of 2001, a sweeping piece of legislation providing favourable tax rates for individuals and corporations.The broad tax breaks, later referred to as ‘the Bush tax cuts’ were extreme in nature but were only meant to be temporary.The Bush programme materially reduced taxes on stock dividends, capital gains, estates, gifts and various types of retirement plans. The initial programs were designed to expire at the end of 2010. However, in 2010 President Obama extended the breaks for another two years in order to help counteract America’s poor economic performance and inability to produce meaningful job gains after the end of the Great Recession.The expiration of the Bush Era tax cuts will amount to a hefty $221 billion of cash coming directly out of American pockets according to the Congressional Budget Office.In addition to the Bush tax breaks expiring, payroll taxes, which were also lowered during the leaner times, are scheduled to be reset to higher levels at the end of the year. The extra payroll taxes would take another $95 billion away from consumers.On top of this amount, other spending changes and the large potential budget sequester drives the total fiscal cliff amount to just over $600 billion. When compared to the present US. GDP of approximately $15.5 trillion, the cliff represents about a 4% setback.Given that the US economy managed to grow just 1.7% last year, the cliff, if left unaddressed, would consume over two years of economic progress and surely throw the country back into recession.If the bad news is that the cliff is fast approaching, the good news is that politicians who want a job or want to keep their job are trying to stay ahead of the curve. In terms of policy platforms, both Republicans and Democrats ultimately would like to avoid the sharp recession scenario and seem to realise that if leaders reach another impasse, nobody wins. Yet with the two parties sharply divided on what to pare combined with an unfortunate lack of leadership in the White House, another stalemate is still possible.More importantly, the fiscal cliff is already creating business inertia that has already become a 2012 issue. Because business owners and managers currently face a major uncertainty as to what the rules will be next year, they are less likely to hire people or spend on plant and equipment.Leading economists have reduced this year’s GDP forecast by as much as 0.5% based due to this developing pattern.In terms of platforms, the Democrats would like to extend the most important tax breaks for the middle class while letting those which benefit the wealthy expire. Inherently, Democrats are in favour of taxing the rich and now the impending fiscal cliff allows them an opportunity to soak America’s wealthiest citizens, who Democratic Senator Patty Murray claims need to ‘pay their fair share.’According to the Senator, Democrats are willing to allow the tax cuts and spending provisions to expire if Republicans refuse to raise taxes on the wealthy. Moreover, President Obama has said that he would veto any attempt to maintain the Bush tax cuts for those earning an income of over $250,000 annually.Republicans are also digging in with the same fervour that we saw in last year’s historic debate. Republican House Speaker John A. Boehner recently declared that Democrats were willing to "hurt jobs and tank our economy" and his party remains steadfast on keeping tax rates level for high earners.Meanwhile, presumptive GOP nominee Mitt Romney, who unlike Obama has a business background, is in favour of extending the Bush tax cuts to give the next president time to put their policies in place without immediately facing the fiscal cliff in January. "Let's extend where we are now, as opposed to looking at a cliff in January that would cause real distress for the economy," Romney also said that he would ultimately propose reforming the tax code by bringing rates down across the board. In general, Republicans would like to preserve defence spending while Democrats are trying to protect their pet social programmes.Given the total amount at stake, I believe we are quite likely to see some sort of a compromise well before year end.However, in the interim markets will be increasingly volatile, the risks to the economic growth are on the downside and the recent strength in the greenback is vulnerable to a sell-off. Clearly, the US is no different that the beleaguered euro nations in needing to balance a bloated budget and intelligently implement an American version of ‘austerity’.Even though the size and clout of the US economy allow the nation much more breathing room than the smaller European economies, the US is clearly not exempt from balancing its budget. The best possible outcome would be an effective fiscal comprise invoking sweeping spending cuts, a smaller government, and less bureaucratic waste in programmes such as Medicare.The largest US corporations have amazed analysts over the past few years with their unrelenting adaptability and ongoing improvement in improving efficiency while adjusting to the slowing global economy. Now is the time for the government to follow suit.