November 23rd – US' day of reckoning?

Monday, Nov 21 2011 by
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November 23rd  US day of reckoning

On November 23, a little known committee of US congress men and women may need to admit that it has failed completely to agree on how to reduce Washington’s massive deficits. By law, the committee’s failure will trigger mandatory spending cuts that may cripple the US economy, while, potentially, triggering another credit rating event yet again.

This story began last August

Congress was in a panic. It needed to pass a bill that raised Washington’s debt ceiling — and fast. Failing to do so could have shut down the Federal government ... threatened the very survival of millions of American families and companies ... and, according to some start a 1930s style depression.

Republicans in Congress agreed to vote for an increase in the debt limit, but demanded that substantial reductions be made in America’s massive trillion-dollar-plus federal deficits as part of any agreement. Almost immediately, Congress became hopelessly deadlocked on how to cut the deficit:

  • Democrats refused to approve substantial cuts in entitlement spending and demanded tax increases on Americans earning $250,000 or more per year.
  • Republicans rejected tax increases, saying they’d kill job creation and investment and demanded far larger cuts in entitlement programs.

In the end, Congress postponed the inevitable, instead they passed a bill that raised the debt limit immediately and put off the decision on how to cut deficits by creating “The Joint Select Committee on Deficit Reduction” — widely known as the Super Committee. The six Democrats and six Republicans on the committee were ordered to do what Congress itself has failed to do for decades to come up with a credible plan that reduces the US’ deficits by at least $1.2 trillion — and do so no later than Wednesday, November 23, 2011But after nearly two months of wrangling, the Super Committee hasn’t even been able to agree on the most basic parts of the plan — like whether to go for $1.2 trillion in savings or to “go big” cutting $4 trillion or more. Whether the Super Committee succeeds or fails on November 23, there is another hurdle to take just a month later when ‘any’ deficit reduction plan will be put to the vote in a highly fragmented Congress.

US’ day of reckoning

If no agreement has been reached by the end of November 23rd automatic, across-the-board budget cuts will need to be implemented. By law, the Defense budget will be cut by $492 billion. Plus, another $492 billion will be cut from health, education, drug enforcement, national parks, agriculture programs and Medicare: cuts that will destroy thousands of more jobs, and are likely to further reduce consumer spending. Those kinds of cuts may break the back of an already fragile U.S. economy and send it spiralling back into the second phase of this great recession, or, even worse start a 1930s depression. Dramatic, just remember the . . .

Impact of the first loss of the US’ credit rating

On August 5, (only!) one of the three major rating agencies - S&P - downgraded U.S. debt due to “political risks” and Washington’s “rising debt burden.” At the same time, S&P warned that if Congress does not come up with a credible long-run plan, additional credit downgrades are likely.

When S&P downgraded US debt . . .

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1. Junk bond prices plunged nearly 10%, while yields soared

2. Bank stocks plunged 30%

3. The Dow plunged 635 points in a single day and 2,000 points in two weeks.

I repeat, when rating agency S&P cut Washington’s debt rating last August, the Dow Jones index plunged more than 600 points in a single day ... and 2,000 points in two weeks.

What may happen if Congress fails to cut the deficit again? All three ratings agencies will downgrade US debt ratings ... and stocks will collapse again — just as in August, but this time, potentially the crash may be much worse.

Crucial dates to note down . . .

Will the ratings agencies downgrade US’ debt soon after the November 23 Super Committee deadline? Or after December 23, when Congress is set to vote on any plan the committee offers. Or on January 15, when Obama is supposed to sign the deficit-reduction bill? 

Will it be different this time? What do you think?


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22 Comments on this Article show/hide all

macroeconomix 21st Nov '11 3 of 22

It is high time for the smack of firm government!

This mindset has been the source of our recent problems - that government can solve all our problems.
It is why we have a nanny police state, it is why the government interferes in the market place, it is the reason why interest rates have been held so low for so long and money is printed to "solve" our economic problems, it is the reason we've had government backed sub-prime mortgages, it is why we've waged costly wars, it is why our freedoms have been eroded, it is why we've embarked on an over inflated unsustainable credit cycle.

So the next time we look down the precipice - we ask for more smacks from a firm government? A boot stamping on a human face forever..

No.

The answer is MORE freedom, not less. And by that I include ECONOMIC freedom.

FDR's policies were a disaster - and it was only after the troops came home from the second world war that the US economy got itself out of a depression, unfortunately with the dangerous military-industrial-complex still in tact.

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emptyend 21st Nov '11 5 of 22
3

In reply to macroeconomix, post #3

This mindset has been the source of our recent problems - that government can solve all our problems.

You are completely misunderstanding what I said! I agree 100% that the government can't solve all the problems - that is why Government should tell the public sector unions to go hang if they strike and pull the existing deal off the table.

There is no amount of government action that is going to restore pensions to their historical levels, especially whilst the economy remains flat on its back and life expectancy keeps rising. The sooner the public sector employees recognise that and get used to the frameowrk of pensions that the rest of us have, the better.

SO by the "smack of firm government" I mean that governments should be telling it the way it is - not following the Labour approach of lying to the electorate and telling them what they think will be popular!

FDR's policies were a disaster

I didn't claim they were a panacea. But STEP ONE to solving a problem is to recognise the nature of it and to be honest with people......and that is where the UK Coalition is doing a vastly better job than Labour did!

ee

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Steven Dotsch 21st Nov '11 6 of 22

Hi Emptyend

Re your "Irrespective of whether the US credit rating gets downgraded, it will still be the largest, most liquid bond market in the world and one of the safest possible places to have one' s money" comment.

I seem to recall, in years past, that global investors have rushed to dump U.S. bonds, driving borrowing costs to astronomical, unsustainable levels. And in one particular case (February 1980) — a time when US' deficits weren't nearly as bad as they are today — they virtually shut down the bond market, making it almost impossible for the U.S. Treasury to borrow money — at ANY cost.

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emptyend 21st Nov '11 7 of 22

In reply to Steven Dotsch, post #6

And in one particular case (February 1980) — a time when US' deficits weren't nearly as bad as they are today — they virtually shut down the bond market

I would guess that the amount of liquidity in US Govvies is now several hundred times as great as it was 30 years ago! ....inconvenient though such things might be for the armageddonistas.

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macroeconomix 21st Nov '11 8 of 22
3

In reply to emptyend, post #5

Apologies for the misunderstanding (it was in the context of FDR using the tool of the state to increase its scope and size that put me off track).

The prospect of a government that tells the truth, and takes a hard line on unions. Now there's a thought...! :)

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emptyend 21st Nov '11 9 of 22
2

In reply to macroeconomix, post #8

OK - fair enough. Thanks for the apols :-)

The prospect of a government that tells the truth, and takes a hard line on unions. Now there's a thought...! :)

Yes indeed. I'm less bothered about the hard line on the Unions per se - but I think there is an absolutely enormous gulf between the relative veracity and honesty of the Coalition Government and the mendacious Labour Opposition. Basically Labour is letting the Unions shoot themselves and the rest of the country in the foot - simply in the hope of being able to gain political advantage......as if we don't have enough problems in the real world without Labour encouraging the invention of more!

ee

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Steven Dotsch 21st Nov '11 10 of 22

Congress is likely to fall short of its deficit-cutting goal, according to JPMorgan Chase & Co. and Credit Suisse Group AG.

Treasuries may rally as riskier assets decline in such an outcome, described as “the most likely” by the Credit Suisse strategists More at: http://www.bloomberg.com/news/2011-11-21/treasuries-rising-most-since-2008-as-budget-paralysis-seen-1-.html#

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Steven Dotsch 21st Nov '11 11 of 22

Just checked the Dow Jones Index: down 300 points and still going down

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tournesol 21st Nov '11 12 of 22
4

One can only hope that before shooting itself in the foot, the Nu Labour Party puts its foot in its mouth.......

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emptyend 21st Nov '11 13 of 22
1

On November 23, a little known committee of US congress men and women may need to admit that it has failed completely to agree on how to reduce Washington’s massive deficits.

They've just announced now that they won't reach an agreement. No huge surprise, given how deep both sides had dug in.

Strange they called it a "super committee" - it looks pretty average to me  ;-)

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Steven Dotsch 21st Nov '11 14 of 22

....while Standard & Poor's rating agency has said it would keep the U.S. government’s credit rating at AA+ after a congressional committee that was supposed to break partisan gridlock and cut the budget deficit didn’t reach an agreement.

S&P, which stripped the U.S. of its top AAA grade on Aug. 5, said it decided that the supercommittee’s failure didn’t merit another downgrade for the country because the failure will trigger $1.2 trillion in automatic spending cuts.

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kenobi 21st Nov '11 15 of 22

to be honest with the automatic cuts across the board legislated in, does it really matter if these clowns agree or not, the republicans won 't agree to any tax increases on the rich, well they've got it. Let them explain why the cuts fall everywhere

its not looking good for Obama next year, shame they threw the body into the sea, or I would suggest they shoot OBP again.

k

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Fangorn 22nd Nov '11 16 of 22
1

Simply raising taxes on the rich in the US isn't the answer Kenobi. They need massive public sector/government spending cuts across the board.

The Democrats wont give in to massive spending cuts. Deluded as usual.
The Republicans wont give in to massive tax increases on the rich, also unrealistic.

There needs to be both but the emphasis has to be on public spending cuts. As indeed is the case in the UK where tax on the rich is already too high.

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Steven Dotsch 22nd Nov '11 17 of 22

Dow closed 2% down yesterday on Super Committee Collapse

While at some point down by more than 325 points, the Dow Jones Industrial Average closed almost 250 points, or 2 percent, down after the special committee of Congress assigned to come up with $1.2 trillion in deficit cuts over 10 years indicated that there would be no deal.

From hereon, the core question should be: will the automatic, across-the-board cuts in U.S. federal spending be enough?

I wouldn’t have thought so.

First, because the automatic cuts are relatively small — less than $1 trillion,

Second, because they're not really cuts like we have seen in Greece's or Italy's. They are merely slowdowns in projected increases.

And most important, because Congress' failure to act sends the message to the world that its democracy is increasingly polarised, its government paralysed, and its finances increasingly out of control.

The next question is: will the three largest credit ratings agencies simply ignore Congress' failure or announce a credit rating cut?

What do you think?

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Steven Dotsch 22nd Nov '11 18 of 22

Another element of this sorry saga is that, the immediate outcome of the Super Committee not having been able to agree on anything, it would make it a lot harder for President Obama to extend the various tax cuts that expire at the end of this year.

With the outlook for the USA in 2012 already looking rather fragile, higher taxes would make a recession even more likely and potentially last longer.

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Steven Dotsch 22nd Nov '11 19 of 22

While the Dow is etching another 100 points lower as we speak, an interesting view from Bloomberg's editors about what next for 2012, at: http://www.bloomberg.com/news/2011-11-22/-show-me-your-plan-should-be-voters-2012-election-demand-view.html#

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Steven Dotsch 23rd Nov '11 21 of 22

Dow Jones down 175 points so far . . .

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