Is the debt-ceiling deal hated because it will work, or won’t work?

August 8, 2011

By James Ledbetter
All views expressed are his own.

As is so often the case when markets drop vertiginously, the explanation you get for what is happening depends almost entirely on whom you ask. There is, for example, a broad consensus that the debt-ceiling deal was a major contributor to the market plunge that kicked in last week.

But, what, precisely, are investors objecting to when they sell in reaction to the debt deal?

That depends.

To hear the deficit hawks tell it, the problem is that everyone can see that the deal was an effort to delay real decision-making on the U.S. debt. My colleague Gregg Easterbrook calls the deal “as phony as a $3 bill,” and argues that stocks dropped precipitously when “markets learned that people at the top of the government of the United States were going to do nothing at all about the national debt, beyond acting like windbags.”

This view is reinforced by David Beers, the head of sovereign ratings at Standard & Poor’s, the man most responsible for the first-ever downgrade of the U.S. On Monday, Beers told a Reuters interviewer that the agency might raise the U.S. outlook to stable “if the agreement between the administration and Congress, the $2.4 trillion fiscal consolidation package, is implemented in full.”

Yet others think that implementing the package is precisely the problem. In a weekly note distributed by the investment bank Nomura, three analysts outlined what they say would be the harmful economic consequences of the Budget Control Act actually taking effect. They note that if the “sequestration” part of the bill is triggered—that is, if the so-called supercommittee can’t get Congress to agree to its recommendations—that “would result in painful across-the-board cuts in discretionary and direct spending evenly divided between defense and non-defense appropriations.” This, in conjunction with the expiring Bush tax cuts, “could completely broadside the US economy…the defense spending cuts could be especially painful as they would likely force military base closings.”

Isn’t it just as plausible, then, that the market selloff is based in part on fears that the economy will slow down for the next several years, not because of debt but because of attempts to reduce it?

It’s entirely possible that the Gordian knot of the U.S. budget right now makes both assumptions valid, though you won’t find many analysts who endorse both views. We may think of market analysis existing separate from political or economic theory. But the truth is that even the most sophisticated analyses have certain assumptions baked in; what an analyst thinks about the relative merits of deficit spending or deficit slashing can strongly color how he or she sees the market moving.

4 comments

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“There is … a broad consensus that the debt-ceiling deal was a major contributor to the market plunge that kicked in last week.”

Really? Who have you been listening to? There is a broad concensus that the deal was not significant, but the pseudo debate covered up many of the signs of a failing U.S. and world economy. You didn’t hear this?

Posted by ptiffany | Report as abusive

“Deserving of a AAA rating.” Oh, please. The ratings agencies were key players in the orgy of looting and systemic accounting control fraud in the FIRE sector that led to the 2008 crash. In our system, the only reason they have any credibility is because they enable fraud, looting, and financial chicanery of every kind.

Posted by lambertstrether | Report as abusive

@ptiffany HAHAHA, I mean HAHAHAHAHA! If you’re ‘listening’ to analysts on TV then that shows your level of financial sophistication. Analysts on CNBC are selling sensationalism or a book or just hyping their own books – very little real value there. Start subscribing to real analyst weeklies (they cost $$$) and you’ll learn a thing or two about the economy.

As for the debt deal fiasco: yes, something needs to be done and most everyone can agree on that, but what was done was the worst of both worlds – didn’t raise revenue, didn’t make long-term structural cuts, just short-term superficial cuts, and didn’t come up with a big enough reduction number. Ending Bush tax cuts for all would be a good start ($250B/yr); slashing identified waste in medicare and defense discretionary would be another ($125B/yr). That’s already almost double what these jokers could come up with after three months of bickering and posturing. I feel bad for Obama because the conservative goal is to humiliate him no matter what the cost but he could have been more proactive about a solution when it was obvious the Republicans were going to drag him into the debate. If he got ahead of that manuoevre he would have come away the clear winner and maybe the T-Pers would learn their place as the tiny minority they are.

Posted by CDN_Rebel | Report as abusive

Everyone is disappointed. Those familiar with the dynamics of longer term public finances are disappointed we didn’t get anywhere. Everyone else eithers pretends to be in denial, or is in denial, and knows something is terribly wrong but are not ready to seriously consider any specifics because it is either over their heads or way too scary to think about.

Posted by threeRivers | Report as abusive