By the way, the cliff doesn't have any effect on the debt, right? So a deal fails to go through, China won't get pissed off?
China doesn't buy treasury notes out of the kindness of their hearts, they buy them to affect the exchange rate.
It looks like there is going to be a fiscal cliff deal by January 3rd that basically erases the entire sequester and extends most of the tax cuts (rates revert to Clinton on personal income above $400k and capital tax rates go from 15% to 20%.) Current spending and tax levels are extended for five years for most stuff but only 1 year for unemployment insurance (a pity since that is the most efficient stimulus).
If my read of the situation is correct then my hopeful prediction from a few weeks ago seems correct. Basically congress erased the sequester fully without any austerity. Economically that's good news. Without austerity dragging us down the economic indicators for 2013 are quite positive. 2013 should be the year that the real recovery starts.
I'm not too worried about the deficit or inequality implications. To solve the deficit long term we want to get back to full employment so cuts right now are mostly (but not universally) unproductive long term. And if the economy does well for the next 4 years we can look forward to the next democratic president having a mandate to finally tackle inequality seeing as the economy will have been recovered by then.
Of course all of this is dependent on what happens with the debt ceiling. If Obama stands firm on his promise to not negotiate and demand that the republicans do their goddamn job without a ransom then he is a strategic genius. If he caves and gives in to their hostage taking this deal suddenly looks pretty bad.