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August 2, 2011
The political confrontation and theatre over the US debt has ended with the House of Representatives voting overwhelmingly in favour of the deal. The deal will raise the US debt ceiling by $900bn over the next few months and by another $1.5tn early next year; and it would cut federal spending by $2.4tn in two stages – the first $1tn agreed, the second $1.4tn still to be thrashed out in detail by a bipartisan committee which will report in November.
Martin Rowson
The priority for the Democrats was to prevent America defaulting and the deal does that. The Democrats gave a lot of ground to achieve that, in that there are spending cuts at a time when the economy is struggling to get out of recession. Tax increases have been forced off the short-term political agenda, and if the US economy stalls, and the rate of unemployment continues at close to 10%, then the debate over the second round of savings is very likely to be as bitter and divisive as the row over the debt ceiling.
That means there will be big spending cuts, with no increase in revenue. Consequently, there will be a summer of political and economic crises in the US. Paul Krugman's judgement is that:
the deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status.
He adds that the Republicans:
will surely be emboldened by the way Mr. Obama keeps folding in the face of their threats. He surrendered last December, extending all the Bush tax cuts; he surrendered in the spring when they threatened to shut down the government; and he has now surrendered on a grand scale to raw extortion over the debt ceiling.
though the Republicans only had control of one house of Congress they succeeded on virtually every point that mattered to them. They angled the threat of national crisis as a brave and heroic effort they'd undertaken on behalf of the national interest.Their rhetoric was that only the threat of national crisis could force the immediate spending cuts supposedly necessary to prevent a far more epic crisis later. instead of just raising the debt ceiling in the customary way so that the government can pay the bills Congress has already run up, the Republicans decided to point a pistol at the American economy and threaten to pull the trigger if they did not get the spending cuts they wanted.
The Republicans did not give up much in return. The Democrats and the White House now seemingly agree with the Republicans (the GOP) that the budget deficit is the biggest obstacle to the nation’s future prosperity; not the lack of jobs and growth.
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Maybe the less-than-enthusiastic response of the US stock market will have more impact than all the well-documented but ignored reports about US unemployment. This is from the BBC:
"US stocks have fallen sharply amid renewed fears for the pace of recovery in the world's biggest economy.
"Wall Street's three leading indexes each ended more than 2% down as another set of grim economic figures saw investors push gold to a fresh high.
"Official data showed that US consumers cut spending in June, while incomes grew at their smallest rate this year.
"A deal in Washington, meanwhile, to avert a disastrous debt default failed to impress credit ratings agencies."
After all, we all know that the stock market is the only real economic indicator, don't we?