Tuesday, August 2, 2011

Hey, It Could Be Worse

This morning's Lex Column in the Financial Times makes a cynical observation about the debt deal that was just reached in Washington:

The latest US budget accord is not the worst last-minute agreement in history. President Barack Obama may be weak, the leaders of the Congress foolishly stubborn and the agreement is not enough to calm markets for long, but Sunday's piece of paper (assuming it becomes law) has more going for it than, say, the 1938 Munich Agreement (which failed to prevent the second world war).

And that just about sums up the opinion of most writers about the deal, and mine as well.

Writing in the Washington Post's blog Wonkbook, here's columnist Ezra Klein's thoughts:

But with the details understood and the legislation on its way to a quick approval in the Senate, it's worth stepping back and saying what we all already know: This is a terrible, no-good, very bad deal.

It's not just that Congress waited until the last minute, taking an unnecessary risk in a fragile economy. And it's not just that the tough decisions got punted once again. This is a bad bill at a time when the economy -- and the American people -- needed a good one. It's a bill that does too little now, and too little later, and it comes in lieu of an obvious, achievable solution that would have done better.

In my opinion, the problem is that the deal does nothing to address the real problems facing our budget deficit. Whether you are Republican or Democrat, or whether you are against increasing taxes or not, the real issue here is how to pay the rising costs of our entitlement programs.

Again, the Lex Column in the Financial Times:

The federal deficit problem is largely a healthcare problem. Health programmes, primarily Medicare and Medicaid, will account for four-fifths of the increase in federal non-interest spending over the next 25 years, according to Congressional Budget Office.

And Sunday's agreement does nothing - zero - to address this issue. All of the savings are to come in the discretionary spending area, largely defense. Whether our enemies will let defense spending decline, of course, is not clear.

So should investors despair?

Well, maybe, but here's more optimistic view from columnist Ambrose Evans-Pritchard writing in yesterday's London Telegraph:

We have a glimmer of hope. The key indicators of the US money supply are at last firing on all cylinders, a dramatic turn for the better that would normally signal recovery or even a mini-boom within the next six to 12 months....

The broader M3 indicator (including large savings deposits) is growing at the optimal rate of around 5pc. It has been an uncannily accurate lead indicator at each twist and turn of our economic drama over the past five years, and is telling us now that the Fed’s kindling wood has at last begun to ignite the damp coals of the US financial system. There is no longer a 1930s liquidity trap. We can infer that the housing market may be nearing the end of its deep slump.

The economy is curing itself in time-honoured fashion...


Mr. Evans-Pritchard is much more concerned about Europe than the United States, and thinks that all attention will soon return to the rot that is threatening the euro zone.

Lots to think about today.