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US debt deal removes the cloud of uncertainty for now

With the US taking its initial steps towards further expansion and deficits and putting an end to the financial impasse with the debt deal for now, inflation woes continue to remain, and get even stronger. Of course, the default is avoided, but the downgrade is unavoidable. The degree of uncertainty has reduced, the uncertainty still prevails.

Rajiv Bhuva        Last Updated: August 9, 2011  | 15:40 IST

On Sunday night, President Barack Obama announced the reaching of an agreement that will reduce the deficit and avoid default - "a default that would have had a devastating effect on our economy."

Yes, for now the US debt crisis is behind us, and markets have begun to cheer the news. Asian indices were up between 0.3 to 2.02 per cent, with the BSE Sensex up by 155 points at 18352 points in pre-open session. Similarly, the Nifty 50 index was up by 45.50 points at 5527.50 in its pre-open session.

On the agreement - its first part will cut about $1 trillion in spending over the next 10 years. Additional $1.5 trillion in deficit reduction would come through a longer term process vide tax and entitlement reform. "The result would be the lowest level of annual domestic spending since Dwight Eisenhower was President," Obama said in his speech assuring that it still allows making job-creating investments in things like education and research.  "We also made sure that these cuts wouldn't happen so abruptly that they'd be a drag on a fragile economy," Obama added. And that is quite a confession, after the Fed Chairman - Ben Bernanke. In a July 7 testimony, around Semiannual Monetary Policy Report to the Congress, Bernanke said; "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." Mind you, US economy grew by a meagre 1.3 per cent in the latest quarter with unemployment still a pressing concern.

PERSPECTIVE
: US debt row adds to global uncertainty

Rajiv Bhuva
Rajiv Bhuva
Back to the agreement, its second part establishes a bipartisan committee of Congress to report back by November (2011) with a proposal to further reduce the deficit, which will then be put before the entire Congress for an up or down vote.  "In this stage, everything will be on the table," said Obama. "To hold us all accountable for making these reforms, tough cuts that both parties would find objectionable would automatically go into effect if we don't act," Obama added.
 
"Most importantly, it will allow us to avoid default and end the crisis that Washington imposed on the rest of America," said Obama. "It ensures also that we will not face this same kind of crisis again in six months, or eight months, or 12 months.  And it will begin to lift the cloud of debt and the cloud of uncertainty that hangs over our economy," he added. .  

The later part of Obama's respite could turn momentary, because credit rating agencies had earlier indicated that deficit-cutting measures of around $4 trillion would be enough for the US to avoid losing its prized AAA rating. However, rating agency - Moody's said on Friday that it may keep the rating unchanged but with a negative outlook, meaning there was still a risk of a downgrade in the medium-term.

However, with the impasse turning a passe for now, uncertainty will subside. And that is visible in the spot price of gold, which has gone down by $14.13 per ounce, or 0.87 per cent. On the currency end, the US Dollar has exhibited little changed against the basket of major currencies. At home, beyond the ongoing results' season, it was the outcome of the US debt crisis which was being looked upon for direction. While the rupee might not exhibit major change, gold prices are likely to see correction in sync with global price movements.

Inflation woes continue to remain, and get even stronger with the US taking its initial steps towards further expansion and deficits. "We're not done yet…..It will allow us to avoid default," Obama concluded in is speech. Of course, the default is avoided, but the downgrade is unavoidable. The degree of uncertainty has reduced, the uncertainty still prevails.
 

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