I think it didn’t surprise anyone that the Super-Committee failed to reach an agreement among its members to cut at least $1.5 trillion from the Federal Budget over the next decade. This failure and the low expectations from this Super-Committee are probably the best representation for the U.S. government’s handling the U.S debt. The current partisan gridlock might eventually pressure the Fed to engage another stimulus plan.
Last time the markets stirred up over the U.S. debt was back in August when the House voted at the last minute to raise the U.S. debt ceiling by $1.2 trillion. A few days later Standard and Poor’s downgraded the U.S.’s credit rating from AAA to +AA.
This time the debate was over the Super-Committee’s attempt to reduce the Federal Budget over the next ten year by $1.5. Following the Committee’s failure there is a “trigger mechanism” that will enact a $1.2 trillion automatic budget cut over the next decade. Many already claim that this “trigger mechanism” won’t be triggered.
Despite this failure, Standard and Poor’s rating agency didn’t change U.S’s credit rating and left it at +AA.
In the mean time the U.S. debt continues to grow and this year’s Federal Budget deficit will be nearly $1.3 trillion.
Even though the rating agency left the U.S credit rating unchanged, I think the financial markets show their sentiment towards the partisan gridlock as the American stock markets along with major commodities prices such as crude oil prices and gold price sharply declined in recent days. These falls are probably stemmed, in part, by many traders’ expectations of U.S. official’s failure to work towards debt reduction.
If the U.S. government won’t be able to reach an agreement on debt reduction, it could further impose additional risk on the stability of the U.S.’s economy. Since the U.S. is entering an election year, it will probably further expand the gaps between the Republicans and Democrats and thus make this scenario more probable.
I’m sure that Ben Bernanke, the Chairman of the Federal Reserve, is watching the debates in Washington; if the debacle of the debt reduction will continue, it will likely to raise the odds of another monetary intervention by the Federal Reserve in the near future.
In the mean time the financial markets continue to suffer with sharp falls in the American stock markets that will probably drag down major commodities prices.
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