Hallelujah, the debt ceiling’s been raised; the U.S. won’t default! It’s time to celebrate; well maybe not so fast. The hard part remains in front of us. First, a second round of spending cuts has to be negotiated – by the same Congress that can’t shoot straight. Second, large spending cuts, even if phased in gradually, will have adverse effects on an economy already sputtering – did you notice the dismal GDP figures recently released?
State and local government spending is on the decline and their payrolls are sinking. With QE2 completed, Federal Reserve and commercial bank credit is likely to falter – and it hasn’t been setting any records. The U.S. credit rating could be downgraded at any time which would raise interest rates and hurt borrowers across the board. With a housing market still reeling, the last thing needed is higher mortgage rates. Finally, spending cuts will have a deleterious effect on consumer confidence. Coming on top of stagnant wages, job uncertainty and over-leveraged households trying to pare their debts, consumer demand for goods and services – the one thing that would encourage corporations to hire more people – will likely languish. We are in a negative spiral that is hard to break and meaningful spending cuts – while necessary for the long-term health of the U.S. economy – could cause problems over the next few years. In fact, incipient austerity measures could exacerbate the debt problem in the short-term if a slowing economy puts a damper on tax receipts.
No sense in playing the blame game. We’ve all had a part – at least indirectly – in creating this mess. While there is no pain free solution, Wide Angle Thinking will offer, in future postings, some suggestions for mitigating the damage; please stay tuned.
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