Is Debt Deal a Straw Man?

Aug 1, 2011 9:15am

ap Debt Showdown jt 110731 wb Is Debt Deal a Straw Man?

ABC’s Dan Arnall (@abcmoneyguy) reports:

Is the fragile framework of a deal to raise the nation’s debt ceiling going to help the U.S. economy? The widely respected Bill Gross, who co-founded PIMCO, isn’t so sure. He refers to the fact that this historic measure will likely do nothing to increase the nation’s miserable and degrading economic situation.

We’re living in a world where 24 million Americans are out of work or underemployed and economic activity is defying expectations by slowing dramatically in the first six months of the year. Will the bill change those measures for the better? Probably not.

Add to that the fact that the hard work isn’t yet done. There are still a few dangerous steps on our road to fiscal redemption which could counteract the current market bounce (Asian markets up 1.5-2 percent and futures for the U.S. open pointing to similar moves here when markets open at 9:30 a.m.):

1.      NOT YET PASSED – Let us not forget the dangers of counting our chickens before they’re passed… should the House or Senate fail to pass the measure, the market will undoubtedly take a nosedive. And they’ll do it knowing there is literally no time left to find a way out of this potential first default in U.S. history. Remember the day when the House was voting on the TARP and failed to get the votes to pass it? The Dow say 700 points erased in a matter of minutes. Let’s hope the vote counters have their pencils sharpened after all these weeks of back and forth.

2.      TOO LITTLE TOO LATE? – Credit rating agencies like S&P and Moody’s still have to give this historic measure a nod with a public move away from a downgrade. If the measure doesn’t pass muster with their sovereign ratings committees the U.S. will still see its credit ratings drop to AA from AAA, likely raising interest rates for everyone including Uncle Sam. A half-percent increase in the rates the government has to pay could quickly erase hundreds of billions in unrealized deficit reduction in an instant.

The euphoria in D.C. (probably justified) can quickly be snuffed out if everything doesn’t fall in place… and quick.

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