Economy Watch: Debt Ceiling Done, More Trouble Ahead

The Budget Control Act of 2011, better known as the debt-ceiling bill, was passed by the House on Monday before speeding through the Senate and was signed without ceremony by the president on Tuesday afternoon.

August 3, 2011
By Dees Stribling, Contributing Editor

Courtesy Wikipedia user AgnosticPreachersKid

Two days ahead of his 50th birthday, President Obama received the “present” he said he wanted for that occasion, formally called the Budget Control Act of 2011, but better known as the debt-ceiling bill. It was passed by the House of Representatives on Monday, sped through the Senate on Tuesday morning and was signed without ceremony by the president on Tuesday afternoon.

In the end, a default by the United States of America will not happen, at least not in the summer of 2011. But now that a precedent has been set for one party — even for a faction within a party — to threaten to obstruct the process of raising the debt ceiling, it’s possible that this formerly routine bit of governmental business will be the grist for political quarrels in the future that does cause a default, with entirely unknown consequences.

More immediately, the fight will be renewed after Congress returns from its August vacation. The Republican “victory” in the imbroglio will likely embolden that party to cling to its stated belief that no taxes should be raised ever again, no matter what. The Democratic “loss” in the debt-ceiling fight will likely energize that party in its quest to make the upper classes pay more taxes, no matter what.

Agencies’ Downgrade: Sooner, Later or Never?

The other shoe in the debt-ceiling fracas hasn’t dropped yet, namely what the major rating agencies will do about U.S. debt. Moody’s, for one, said on Tuesday that the country will retain its AAA rating for now. The United States has held that rating since 1917, when Moody’s first started assigning public debt a rating, but now it has a “negative” outlook on the rating.

“While the combination of the congressional committee process and automatic triggers provides a mechanism to induce fiscal discipline, this framework is untested,” the company said in its statement. “Should the new mechanism put in place by the Budget Control Act prove ineffective, this could affect the rating negatively.”

Thus all bets are off on that “untested framework.” The “automatic triggers” would take large chunks out of the defense budget and payments to Medicare providers if the super committee fails. As the November deadline for the super committee’s report approaches, deadlock by the committee is entirely likely if each party sticks to its completely at-odds policy goals. Lobbyists for both the medical industry and the defense industry will be out in force trying to help the super committee make up its mind cut someone else’s funding, but even those fearsome lobbyists might not be enough to budge the committee, considering the potency of the ideologies now in place.

Other Woeful Economic News

Default may be postponed, but other economic bad news hasn’t been. On Tuesday the U.S. Department of Commerce that consumer spending dropped 0.2 percent in June, the largest decline since the bleak days of September 2009. Spending had increased month-over-month in May by 0.1 percent. Personal income during June was up a minuscule 0.1 percent.

That report came on the heels of a separate Commerce report on Monday that showed that the U.S. manufacturing sector — a stalwart part of the economy since right after the Panic of 2008 — barely grew in July. New orders, a leading indicator, actually turned negative.

Wall Street wasn’t happy about the debt-ceiling deal or anything else on Tuesday, with the Dow Jones Industrial Average dipping 265.97 points, or 2.19 percent. The S&P 500 lost 2.56 percent and the Nasdaq was down 2.75 percent.