As I write this, it is starting to seem like most of the things that have been making so much of our economy here in the US, especially as it pertains to banking and Wall Street, figured out over in Europe. I will agree it seems like we have been close a couple of times before and there is certainly not an absolute, but we have gotten new technocratic governments in both Italy and Greece the seem largely on board with the changes that need to be made and we have an EU that seems largely on board with the support that it needs to offer to keep anything of a major collapse from occurring anytime in the real near future. With the strong earnings, combined with a very modest growth in the economy and very slight dip in the unemployment rates, some forecasters are starting to shoot for a positive 2011 after all. Not so fast I say…
If we think the jumbled mess that was the end of June and July really shook the home markets with lasting problems that really took until just a few days ago to gain it back, we have not seen anything yet. You may recall that back at that point there was a spending limit that needed to be upped or the federal government of these United States would have to be stopped spending due to an upper limit of what we could borrow. After a more than a few false starts, a rating reduction on our debts, and really only a last-minute deal that kicked the major decisions to a so-called ‘Super Committee’ did it barely eek through an approval.
Guess what is coming up in just under two weeks time though? Yeah, you guess it. The deadline for that Super Committee to act. If you recall, there were built-in cuts in spending that both the left and right would really not like if a deadline of basically the day before Thanksgiving was not met. It should be really simple for the Super Committee result to be voted on in time, as the rules for this pretty much stipulate it is to be an up or down vote by both houses of Congress, so that is not really going to be issue from that stand point. Of course, I say that, know full well for the Super Committee to compromise there is likely going to be some adjustments to the taxes, especially the wealthiest and that is apt to get a fair number of down votes from staunch Republicans and likely most Tea-Party Republicans.
But, that aside, we are within, as I said, just under two weeks until the Super Committee has to give out something for the Congress to vote on or the automatic cuts to both defense and many social programs will automatically take effect. And guess what, the Super Committee, by all reports is a far stretch away from actually reaching a compromise that both sides could support and bring the respective floors. Granted, there has been some discussion in the last day or two of some possibility of some compromise on some issues. But by all accounts, it the first of many steps that would be required for a compromise enough to actually meet somewhere in the middle. Yep, the reality of the situation is that I will be more than pleasantly surprised if they manage to actually get this done on time for the looming deadline.
So, lets ponder what will likely happen to the markets and economy for just a second if they do not manage to come together. First, the obvious is that we, the United States are apt see a further downgrade in our credit rating by some of the credit rating agencies. After all, that would pretty much be in line with the things those agencies have cited as causing the original downgrades and further give cause for concern over our huge debt. That, along with the general ill feeling of things, is very likely to cause the markets to lose any gains that have been made over the last month or so and very likely, puke up even more losses to be honest.
That of course is just the tip of the proverbial iceberg. After all, the markets sliding that hard again is very likely to cause a slowdown of production and certainly will impact any plans for additional expansion and/or increased production by industry going into the close of the year and the beginning of next year. The huge cuts in defense will put all the defense contracts in jeopardy, causing a huge increase in unemployment as well as less cash in the economy – not to mention the likely impacts it will have military personnel cuts.
Then thing about the cuts on the social side and what that will do to the economy in regards to the slow down that will occur in spending by huge segments of the economy. Fixed income elderly will be hard hit no doubt and their current limited spending will all but stop. The same can be said for just about any program that will be cut – the end result is that money will cease to be a factor in our overall economy – and think about how many times some of that money rolls over.
Indeed, if they do not reach an agreement the end of 2011 and into 2012 will be some of the ugliest economic times any of us have seen in our lifetimes, to be sure. Â Where is the great Henry Clay or someone of his ilk when you most need him?
** – Image of Henry Clay and believed to be in the Public Domain.