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The Real Reason for Sell-Off: Congress

If you think the recent sell-off was all about China or the Fed's economic outlook, think again.

Something else is at play and we're hearing it's a major market influence.

A growing number of investors -- including Fast Money's Steve Grasso -- are worried that the already weak economic recovery will be snuffed out all together if Congress fails to extend the Bush tax cuts.

In fact, they say allowing the Bush tax cuts to expire will be kind of like a tax hike.

It’s a scenario that was laid out by Deutsche Bank last week. "In a worst-case scenario, allowing the Bush tax cuts to expire (and failing to fix the AMT) could result in 1.5% of fiscal drag in 2011 on top of the 1% fiscal drag we expect to occur as the Obama fiscal stimulus package unwinds," the bank said recently in a note to clients.

"If the recovery remains soft/tentative through early next year, this additional drag could be enough to push the economy to a stalling point."

Whether or not any or all of the cuts should be extended is emerging as perhaps the key issue heading into the mid-term elections.

Most Republicans say that letting Bush's tax cuts expire amounts to a tax increase -- the last thing a country should do in the middle of a recession.

Democrats counter that with the federal deficit at a record high, the country cannot afford to take more money out of the treasury, especially to finance lower taxes for the wealthiest Americans.

President Obama wants a compromise - he's asking Congress to extend the cuts for individuals earning less than $200,000 a year and families making less than $250,000 annually.

How will it all play out?

”I think the likely scenario is that they get extended for people making less than $200,00,” says Dan Greenhaus of Miller Tabak. “And that’s going to be really important to growth next year.”

* Hear more about this potentially explosive political issue as well as the potential for a second stimulus. Check out our interview with Dan Greenhaus above.



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Trader disclosure: On Aug 13, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour owns (BAC), (BX), (GOOG); Adami owns (AGU), (BTU), (NUE), (C), (GS), (INTC), (MSFT); Adami’s wife works at Merck; Terranova owns (AKAM), (BAX), (FCX), (MOS), (PFE), (SU), (XBI); Terranova owns (GLD) Calls; Jon Najarian owns (CSCO) short calls; Jon Najarian owns (LVS) short calls; Jon Najarian owns (AA) short calls

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