When economic analysis...

is not tempered with political reality, you end up with statement like the below, which completely ignore the relative positions within countries and the resultant world order dominated by the U.S.A.  Once again I ask readers for their prediction of prospective volatility for NON U.S. assets (yes, I realize this question is recursive, but indulge me) in the next five years and the resulting effect for continued demand for U.S. financial assets.

There will be no "drastic cuts", even if that outcome materializes.  We once again return to basic monetary operations.  In an environment where the output gap is so massive (evidenced by unemployment, credit structure, Housing, etc.) additional deficit spending adds financial assets and assists the private sector in its recovery.  Now, there "will be" malinvestment in this process, but political mana from heaven invariably produces winners and losers.  What is important is the underlying institutional resilience that (ostensibly) operates to minimize the variance in this malinvestment.

It is an eventuality that doesn't just put fear into the hearts of Americans. In its annual report on the US, the International Monetary Fund (IMF) referred to the fiscal cliff as the largest risk currently facing America. Investors have already reportedly become more cautious in the face of the looming cuts. Should politicians not agree to a credible plan for reducing US debt, it could ultimately harm the credibility of the dollar as a reserve currency. More immediately, the IMF writes in its World Economic Outlook report published in October, the drastic cuts "would inflict large spillovers on major US trading partners." In other words, an already fragile Europe would become even weaker.