This is a guest post by Peter Lavelle
S&P has cut the US outlook from stable to negative. So can Republicans and Democrats put aside their differences to tame the supermassive deficit before the US implodes?
In the last 24 hours the ticking clock Republicans and Democrats have been operating under regarding the US deficit struck an intimidating bong. Ratings service Standard & Poor’s has slashed the US economic outlook from stable to negative – reflecting behemoth debt the US acquired in 2009 and the miniscule odds of its being paid back before 2014.
S&P has said that the US ratcheted up a supersized debt of 9% GDP in 2009 – compared to 2-3% in other triple-A nations. The service still considers the States a safe place to put cash but thinks that unless steps are taken US credit worthiness could crumble. So what are the odds the US can step up to the plate and tackle the deficit before the markets start panicking?
The marriage of chalk and cheese?
It all depends on how good Republican and Democratic politicians become at holding their noses around each other. Both the GOP and President Obama have plans to slash the deficit – each proposing to cut around $4 trillion in the next decade or so. However in an ideological sense the proposals resemble chalk and cheese.
In his budget President Obama proposed to tackle the deficit through spending cuts of $2.0 trillion plus $1.0 trillion in tax rises. He aims to protect aid programs such as Medicare but put a hacksaw to defence spending. In addition he proposes forcing richer citizens to contribute a bigger piece of the pie.
To the shock and surprise of no one Republicans oppose this. In particular senator Paul Ryan has stated that Democratic plans spell Godzilla-like government and a deficit that could balloon out of control. His proposal involves $5.8 trillion in spending cuts alongside $4.2 trillion in tax cuts to bring the US back to health. Unlike President Obama Ryan aims to balance the budget in 2040.
The ultimate game of dare
So who’s proposals are going to emerge victorious? To date the markets have been cheered that US politicians have formulated plans at all. Until a month ago it seemed Republican and Democrats were stuffing tissue into the ears and singing whenever the issue emerged. That though won’t help US sentiment in the long run if the parties hold their lines of battle. Something has to give.
Speaking to the Los Angeles Times over the weekend Professor William Howell of the Uni. of Chicago painted a dismal picture of the future. He noted that though politicians puff out their chests and talk about slashing at spending – to appease all parties just minor change makes it onto the statutes:
“I think the most likely outcome is we see modest to meek changes in the immediate future, with promises of greater changes down the road.”
So time alone will tell if Republicans and Democrats can give up their sacred cows as the deadline on cutting the deficit beckons.
Peter Lavelle at specialist foreign exchange broker Pure FX