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Debt-limit debacle draws to a close…for now

By ANDY SULLIVAN and JEFF MASON
August 2, 2011

Clouds pass over Capitol Hill in Washington. REUTERS/Joshua Roberts

The United States is poised to step back from the brink of economic disaster on Tuesday as a bitterly fought deal to cut the budget deficit is expected to clear the Senate and President Barack Obama‘s desk.

Just hours before the Treasury’s authority to borrow funds runs out — risking a damaging U.S. debt default — the Senate was expected to approve the deal to cut the country’s bulging deficit and lift the $14.3 trillion debt ceiling enough to last beyond the November 2012 elections.

The bill cleared its biggest hurdle on Monday evening when the Republican-led House of Representatives passed the measure despite noisy opposition from both conservative Tea Party members, who wanted more spending cuts, and liberal Democrats angered by potential hits to programs for the poor.

The vote in the Democratic-controlled Senate, due to take place at noon EDT (1600 GMT), is expected to be less dramatic. If approved, Obama would sign the bill into law shortly afterward.

That would mark the end of a fierce partisan battle that has paralyzed Washington for weeks and spooked investors already nervous about the weak U.S. economy and sovereign debt woes in Europe.

But it would by no means signal an end to uncertainty over the sustainability of U.S. tax-and-spending policies and the deep political divide that the deficit debate has exposed.

Relief in financial markets over an end to the gridlock on Monday quickly turned to concern about the struggling U.S. economy and the risk that the deal is not enough to avoid a possibly damaging downgrade of the top-notch U.S. debt rating.

The plan approved by the House on Monday would raise the existing $14.3 trillion borrowing limit by enough to last into 2013. It calls for $2.1 trillion in spending cuts spread over 10 years and creates a congressional committee to recommend a deficit-reduction package by late November.

Two major ratings agencies have said that $4 trillion in deficit cuts would allow them to confirm America’s AAA rating.

A ratings cut would probably push up U.S. borrowing costs, further hampering the economy.

“The resolution to the debt ceiling does remove one cloud of uncertainty but it does not change the economic reality,” said Greg McBride, senior financial analyst at Bankrate.com.

“It’s going to take years to come out of this. We’re sitting in the terminal waiting for the economy to take flight and instead it’s just being delayed month after month after month.”

MORE STRIFE AHEAD

The compromise deal was agreed after weeks of angry debate and brinkmanship between Democrats and Republicans.

With unemployment above 9 percent and the economy barely growing so far this year, Americans have become increasingly angry over the partisan attacks and refusals to compromise.

They may soon face the next round of noisy sparring over ideologically fraught tax and spending policies.

The new debt committee’s work is likely to launch sharp political rhetoric as the November 2012 presidential and congressional elections near and arguments break out over the expiration at the end of 2012 of tax cuts pushed through by former President George W. Bush.

The deal in Congress is a far cry from a $4 trillion deficit-reduction pact including revenue increases that Obama and House Speaker John Boehner, the top Republican in Congress, appeared close to clinching just over a week ago.

Although all sides conceded some ground to secure a deal, the final bill represented a triumph for the Tea Party camp in the Republican Party, which dug in its heels against any tax hikes and pushed for spending cuts.

Many congressional Democrats were dismayed that Obama and their party leadership did not do more to include some tax increases and provide more protection for social programs.

“I understand that this train is leaving the station, but it is going in the wrong direction,” said Representative Jim Moran, a Democrat from Virginia.

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5 Responses to Debt-limit debacle draws to a close…for now

  1. b mcclellan

    August 2, 2011 at 9:44 pm

    Angry brinksmanship ,
    or Treason by theft of funds you we’re elected to guard ?
    RICO, anyone ?

    • Carl Nemo

      August 2, 2011 at 10:03 pm

      Agreed Bryan. Unfortunately treason has become an anachronistic, almost quaint term in our so-called ‘modern era’

      These treasonous, demonstrably profligate usurpers have their new hip ‘buzzword’ to quash all opposition to their ongoing schemes and scams; I.E., pin the word “terrorist” on those who would question their now invalid authority and nation-destroying actions.

      Carl Nemo **==

      • b mcclellan

        August 2, 2011 at 10:19 pm

        Oath of Office.

        One more casket with unlimited scuba.

        A lie,

        Hardest thing in the world to remember..

  2. woody188

    August 2, 2011 at 11:32 pm

    Few foreign investors are actually buying the Treasury bills. It’s the Federal Reserve just printing the money and buying the debt. Which means they really just passed a deal that effectively creates quantitative easing three (QE3) to the tune of $2.1 trillion dollars. QE1 and QE2 tanked the Dollar and inflation rose at double digit rates. What do you suppose QE3 is going to do?

    And since this virtual QE3 is only going to be distributed via the Federal Government, it’s pretty much guaranteed to get less bang for each buck. But I expect the usual insiders will make out quite well, at least short term. This bill also pretty much ensures we won’t be able to service our debt by 2013. What then?

    • Carl Nemo

      August 3, 2011 at 12:12 am

      Everything has become “smoke and mirrors” relative to our now certifiably “Potemkin Village” government.

      One of my brothers, while visiting Australia opened a “passbook” account and is going to enjoy 6% on the account per annum along with a currency that appreciating against the USD…!?

      Are there any questions folks…?

      Another way to participate in the Aussie currency success story is to buy the FOREX based, RYDEX fund currency shares, symbol FXA via your brokerage account in order to hedge your losses in USD buying power. The Canadian dollar is all too linked to the U.S. economy whereas Australia is not. When Australia catches a cold from U.S. downdrafts, Canada catches the ‘flu”.

      Carl Nemo **==