Bloomberg today has an interesting twist: U.S. Futures Decline on Concern Supercommittee Won’t Agree on Budget Cuts. In reality, US rates are down, suggesting no increase in debt concerns whatsoever.
But if you read the Bloomberg piece carefully, what it actually says is that market players fear that the absence of a debt deal means no stimulus. So the actual fear is not that spending won’t be cut enough, it is that it will be cut too much—which actually makes sense, and is consistent with the action in stock and bond markets.
There’s no real reason for the market to care whether deficit reduction comes through “the trigger” or through a supercommittee deal. It’s about $1.2 trillion either way. If you’re worried about how much debt the United States is carrying around, the supercommittee’s failure changes nothing.
But from the perspective of near-term stimulus, and thus next year’s economic growth, the supercommittee’s defeat could change quite a lot. As JP Morgan’s Michael Feroli writes, “The real near-term fiscal issue is the expiration of certain temporary support measure at the end of the year, in particular the payroll tax holiday and emergency unemployment compensation. While the fate of those measures are not directly tied to the supercommittee, this week’s failure to come to an agreement probably reduces the likelihood some that those programs get extended, and thus we can expect a noticeable drag from fiscal consolidation early next year.”
The collapse of the talks has nothing to do with the stock market. Europe is leading the world to depression. US lawmakers failed to replace $1.2 trillion in budget cuts with some other $1.2 trillion in budget cuts. Either way, there will be $1.2 trillion in budget cuts. Every rating agency has come out and said that this will not have any impact on US long-term borrowing rates. And even if they did, like Standard and Poor’s did earlier in the year, it had absolutely no impact on those borrowing rates. In fact, those rates plunged even lower.
It's awfully difficult for TV pundits to keep up, particularly the ones in DC, but the Super Congress failing just doesn't mean much. What matters is that we still have a shitty economy and austerity isn't working. Also, too, Europe.