Q: So is the United States in real trouble? Is THAT the fiscal cliff?
A: Not exactly. The people who lend our government money are still happy to do so. (One reason for that is we pay them not only what we borrowed but also a little extra. That extra is called "interest," and it's why people are willing to lend money. So in our allowance example, you might borrow $5 from your neighbor but promise to pay back $6. That would be the original $5 plus $1 in interest.) But political leaders worry that might change someday, and they want to keep it from happening. In other words, we don't want to wait for our neighbor to stop lending us money before we get the government's spending in line with taxes.
But Republicans and Democrats can't agree about how to bring down the deficit. Republicans, in general, want to solve the problem by cutting spending. Democrats want to solve the problem in part by raising taxes.
Q: So where's this cliff?
A: There isn't an actual cliff. But through a series of decisions in the past, Republicans and Democrats decided to put in place a bunch of policies they really, really don't like, all set to take place at the same time, so that they would essentially force themselves to work together to come up with a better plan. That time is now. Or, more precisely, January 1 — about a month away.
Q: That sounds crazy!
A: Yes, it does.
Q: So what happens if they don't come up with a better plan?
A: This is where the cliff comes in. If there isn't a new policy agreed to by January 1, taxes will go up on almost everyone. Spending will be cut on a lot of things the government does. If these things happen, they will probably hurt the economy. It could be so bad that it would feel like falling off a cliff.