Long Term Deficit and Debt Reduction

"We need to tell markets very clearly -- and this must be done soon -- that there is no other way forward than the one we’re pursuing.”

Question: Who was the U.S. Congress Super Committee member who stated the above on November 21? Actually, it was Michael Meister, a senior lawmaker in German Chancellor Angela Merkel’s coalition. However, similar sentiments could have been expressed by the U.S. Congress as the nation also struggles with long term deficit and debt reduction; the process should continue.

This week, U.S. financial markets and global markets have focused on the U.S. Congress Super Committee, with no Committee recommendations to reduce long term U.S. government deficits. Dissenting discussions included $1.2 trillion in spending cuts and a counter proposal of $1.2 trillion in tax increases.

The outcome now results in automatic government spending cuts with Department of Defense (now with a possible additional $500 billion in cuts on top of $450 billion announced August 5), and possibly government health care spending, at the top of the list; the CBO estimates 71 percent of the cuts would come from programs such as education, the environment, transportation, housing assistance and veterans’ health care. Under existing legislation cuts to Medicare, the federal insurance program for the elderly and disabled, are limited to a maximum of 2 percent for payments to hospitals, doctors and other health providers and to private health plans participating in certain related programs. Members of Congress are already preparing legislation to modify the automatic spending cuts provisions, which are now scheduled to be effective in early 2013.

Standard & Poor’s, however, stated it would keep the U.S. credit rating at AA+ and Moody’s Investors Service reaffirmed its AAA rating; Fitch has not yet commented. Despite the Super Committee failure, the U.S. dollar and investments in Treasuries remain strong among global investors. The yield on the 10-year note declined 6 basis points, or 0.06 percentage points, to 1.96 percent in New York yesterday, according to Bloomberg Bond Trader prices, while the Standard & Poor’s 500 Index dropped 1.9 percent to 1,192.98.

The long view is a blend of domestic cuts and tax increases.

Separately, as announced this morning by the U.S. Commerce Department the U.S. economy expanded less than previously estimated in the third quarter. GDP increased at a 2 percent annual rate from July through September, less than projected and down from a 2.5 percent prior estimate. At 930am today global equity markets are flat and U.S. futures are down slightly. 


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