As the fiscal cliff draws near, one investor attempts to belay straight up it

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No, a fiscal cliff is not quite this literal.

By Alex Silady

The great current elephant in the room of American national politics is the impending fiscal cliff. It is in the back of everyone’s minds, especially in the media; marketwatch.com has a weirdly morbid fiscal-cliff countdown clock that times the financial apocalypse down to the second on its home page. Based on the news, everyone knows two things: One, it will happen in the near future if something is not done about it; two, if it in fact happens things will get very bad. But that seems to be the extent of most people’s knowledge; an informal survey of New Yorkers in Washington Square and Union Square Parks revealed that only 5% of them could explain the fiscal cliff problem in detail.

Thankfully, Shane Bigelow knows more than enough on the topic to make up for the ignorance of the rest of us. Bigelow, an investment manager at the Manhattan firm Alliance Bernstein, admittedly has even more at stake from a fiscal cliff than the rest of us: He stands to lose not only his own money but that of his clients in a worst-case scenario.

According to Bigelow, the fiscal cliff means the state of the national budget if the two parties cannot agree on how to change taxes and spending. The cliff would require a $500 billion budget cut, which would shrink the GDP and lead to yet another recession on the scale of the 2008 economic crisis.

Said Bigelow in an interview on last Monday morning, “This would all be much easier decades ago when the US was more isolated from the other economies of the world. But now the market is global, and the US is a major importer from places like China. Obviously China has an advantage in that the government can purely dictate production, but even they need American capital. If we go down we take many other people down with us.”

Bigelow said, while wringing his hands in nervous anticipation, there are multiple ways the end of the crisis could play out.

“There are three things that could happen. One is no agreement is reached, and everything tanks. The second is that the Democrats and Republicans hash out a full, specific agreement, sing ‘Kum Ba Ya’, and the consensus leads to a working budget. The most likely scenario, the one we’re counting on, is that the two sides will, under pressure, work out a general agreement, argue about the specifics later, and everyone will make small sacrifices.”

Pointing to patterns of investment in the aftermath of the Great Depression, the dot-com bubble, and the 80s savings and loan crisis, Bigelow advised his audience to buy stocks in solid, stable companies that have seen their prices drop due to investors’ wariness about the fiscal cliff.

“There is always the human element in the world of finance. And for all of our psychological knowledge, people are still somewhat unpredictable,” he said. And he agreed with the characterization of the entire crisis as a problem of incomplete knowledge – the highest-stakes game of Prisoners’ Dilemma of all time.

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