Another Deal Older and Deeper in Debt

August 2, 2011

The U.S. political deal to raise the debt ceiling and avert default has gone over like the proverbial lead balloon.  Financial markets gave it two thumbs down, and so did much of the press.  The Byzantine U.S. tax code was not addressed.  Unsustainable trajectories in domestic entitlement programs were not fixed.  Military spending may be cut deeply without regard to actual security needs.  The excruciating process that was played out highlights serious flaws in the constitution and the current state of politics in America.  Politicians failed to segregate what needs to be done in the long term from what ought to be  addressed in the short term and, as a result, got both tasks wrong.

Below are ten consequences I expect from the Federal government’s latest handiwork.

  • A downgrading of the U.S. triple A credit rating before end-year.
  • An 80% chance of recession starting no later than the first half of 2012.
  • A larger deficit-to-GDP ratio by the end of that downturn.
  • Unemployment climbing back to 10%.
  • Because the Fed’s hands are tied, the central bank will do nothing or stimulate too lightly and too late to avert the coming recession.
  • The Dow is closing in on the 1982-2000 bull market peak of 11,723 and will sink below 10K if a recession occurs.
  • The U.S. and European struggles will feed one another.  Just because GDP fell by a steep 5.1% in the 2008-09 recession doesn’t rule out the possibility that the coming downturn may be pronounced and prolonged.
  • Obama will probably be a one-term president.
  • Despite a lot of negative press lately, the Tea-Party movement will positively exploit the volatile political circumstances.  In times of chaos, the spoils go to whomever is most ruthless, like the Russian Bolsheviks.
  • The increasingly skewed distribution of U.S. wealth and income will become even more so.  Because of the diminishing marginal utility of money, this trend dampens the potential growth rate of aggregate personal consumption.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



One Response to “Another Deal Older and Deeper in Debt”

  1. matthew says:

    So the Mayans were right?