James Saft

Don’t buy any debt deal relief rally

Jul 28, 2011 21:10 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

HUNTSVILLE, Ala. — If history is any guide, we will soon see a deal to lift the debt ceiling, followed by yet another cockamamie relief rally.

Don’t buy it; even if we get past the debt ceiling, and even if the U.S. can avoid a ratings downgrade, the situation facing U.S. assets is still grave. Firstly, cutting the deficit is a process, one with multiple opportunities over time for disruptive market events, but moreover one whose ultimate outcome, at best, is going to hurt corporate profits and suppress economic growth.

And even putting aside the impact of falling government spending, recent data shows a cooling manufacturing economy, consumers who are not consuming and a dangerously weak housing market.

While it’s possible that Aug. 2 arrives with no agreement to raise the debt ceiling and begin cutting the deficit, that outcome is a form of ritual suicide that both Democrats and Republicans will probably collectively choose to avoid.
That’s good — a default would be horrific — but a deal won’t change the terribly weak fundamentals now facing the U.S., and U.S. corporations in specific.

David Levy, of the Jerome Levy Forecasting Center, maintains that a $1 trillion widening of the federal deficit between between 2007 and 2009 was responsible, nearly single-handedly, for slowing and eventually reversing the economy’s decline. Take that away, and away it will be taken, and corporations have precious little to make up the shortfall.

The death of the Treasury benchmark

Jul 26, 2011 15:13 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

A U.S. default or debt downgrade may set off market fireworks but the longer-term effects of the death of Treasury bonds as a universal benchmark of risk may ultimately be more significant.

The U.S. appears to be slouching towards a self-inflicted debt crisis, with Democrats and Republicans unable to agree a plan to lift the $14.3 trillion debt ceiling by the Aug. 2 deadline.

Even if such a deal is agreed, it may not be radical enough to satisfy ratings agencies, notably S&P, which has said it wants to see a $4 trillion reduction over 10 years. A deal on that scale seems unlikely by the deadline, meaning we may be looking at another round of negotiations in 2012, an election year.