If nothing changes, on January 2 the US will start reducing both civilian and military spending, and taxes will increase.
How did it come to that? In 2011a bipartisan commission was created to reduce the deficit. The commission had equal number of members of both parties. As inducement to come to an agreement, both military and civilian spending were to be cut significantly from 2013 on if no agreement is reached. In the end members voted according to party lines and, indeed, there was no agreement.
The main increase in taxes is due to expiration of the extension of tax cuts introduced by Bush in 2001. They were extended two years ago as the parties could not come to an agreement beyond moving the problem past the presidential election. This is called"kicking the can down the road. Read about it here.There are several other laws that will raise taxes next year.
Bottom line: the US political system became dysfunctional and is unable to make difficult decisions.
So far Canada has not suffered, except for the overvalued Canadian dollar. But if shares in the US fall by 20% as Goldman Sachs predicts, Canadian stocks will fall as well. US economy may fall into a recession if nothing is done; as the Canadian economy is not in great shape, it may follow.
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