Sunday, July 31, 2011

And we have a deal!

Surprise, surprise, Washington managed to eke out a deal just in time to satisfy the "markets". As a side note - it's hard to govern when you make every policy decision based on the daily gyrations of the USDJPY.

It's hard to imagine this being more convoluted but in Washington anything is possible. The debt ceiling goes up by $900 billion (which basically only lasts until Christmas b/c we've already spent about $300 bil beyond our ceiling since May -- Boehner says this will last until Feb, we'll see). The deal guarantees $917 billion in cuts over the next decade but for perspective that is less than 10 mths of debt at our current rate of spending.

Also if the previous plans are any guide much of these cuts will be back-end loaded. As I understand it we'll get $45 billion in "cuts" before we have to hike the ceiling again. As I expected, the debt ceiling goes up, there are no new revenues and spending cuts are mostly Washington's version of vaporware - Yeah! Let's all run home and start those re-election campaigns!!

This is where the real comedy (or tragedy depending upon your viewpoint) kicks in --- " an additional $1.5 trillion in cuts to be worked out on a bipartisan basis as the price for another increase in the debt ceiling next year."

So between now and January Congress is going to learn how to compromise and come up with $1.5 trillion in cuts so we can extend the debt ceiling again? I think it will have a better chance of happening if I just write a letter to Santa.

As a side note, both Moody's and S&P have slipped back into the role of issuing toothless ratings. S&P had said all along any cuts in spending that didn't total $4 trillion would lead to a downgrade. Now, they seem to be backing away from that and saying $917 billion in cuts ten years from now will be just peachy. Watch for news on China's rating agency making waves later this week.

Stocks are rocketing over in Japan on this news, but everyone expects this to fade because the reality is that our economy is showing severe cracks despite all of the stimulus programs. However, as I've said before when everyone expects the market to zig it usually zags and everyone thinks this rally is fake so it might actually have some legs.

So, what's next for our staggering economy? Will the Fed step in with Qe3? Maybe. Another stimulus? Unlikely. Stay tuned for the next episode of As Washington Turns.


P.S. - Do we have any rainy day money left over for a quick little war with Syria? It seems while we've been chasing shadows around the MENA region (Egypt, Tunisia, Libya) Syria is actually using their military on their own people. Scary stuff.

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