World share markets rose markedly on Monday this week: the US S&P 500 (by 2%), London FTSE (by 2.4%), Paris CAC (by 2.9%), Tokyo Nikkei (by 1.4%), and the Hong Kong Hang Seng (by 0.5%).

Europe saw the biggest daily gain in 10 weeks, but from the lowest levels for months. The gain in the major indexes in the United States still left them around 3% lower than on 6 November 2012, the day of the US presidential election.

Mainstream media commentators widely attributed these latest gains, and the earlier weakness, to changing fears about how the United States would deal with its pending ‘fiscal cliff’.

So what is the fiscal cliff and why is so much global wealth at risk?

The fiscal cliff, a term coined by US Federal Reserve Governor Ben Bernanke, refers to major spending cuts and tax increases that are scheduled to start at midnight on 31 December 2012 if the US Congress cannot agree on a compromise by then.

The combined measures are equivalent to about 5% of US GDP. The Congressional Budget Office has estimated that if the measures come into force, output will fall by around 3%, and the unemployment rate will reach 9.1% by the end of 2013.

So markets now have to price the possibility of a grim short-term ‘double-dip’ recession. The rebound on Monday follows indications from US lawmakers that mitigating compromises are possible.

But, to quote one of John Wayne’s classic cowboy movie lines, “That ain’t the worst of it.”

As explained here by an outfit called The Committee for a Responsible Federal Budget, the worst-case scenario is for the Budget Control Act to be repealed in its entirety and nothing to be put in its place. If that happens, the United States would rapidly climb up a public debt mountain.

The US Treasury warned this month that the United States could hit the current debt ceiling of US$16.4 trillion by the end of 2012. Satyajit Das reports that it might be able to juggle its finances to put this back perhaps to February 2013.

What is the most likely outcome? Surely a messy, muddling, compromise.

What might be the best and most sustainable outcome? Productivity-raising and credit deficit reduction measures aimed at encouraging sustainable profitable capital formation. What are the chances of this? To borrow another John Wayne movie line: “Not hardly.”