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.