U.S. Debt Deal: Out of the Frying Pan and into the Fire?

Now that the Senate got the ball rolling and (finally) passed a new debt ceiling plan, what’s next for dear old Uncle Sam and his scrillas?

First, here’s a short description of what’s part of the debt deal. Of course, you could always check out my U.S. debt deal article last Monday for details.

  • The agreement raises the debt ceiling by $2.4 trillion over the next three years.
  • This will be accompanied by $900 billion in spending cuts over the next 10 years, in an effort to trim the U.S.’ budget deficit.
  • A super committee made up of representatives from both the Republican and Democratic parties will be formed, and will be tasked to trim the deficit by an additional $1.5 trillion.
  • Potential tax code overhaul as well as changes to social programs like Social Security and Medicare.

When the deal was struck over the weekend, it seemed to spark a bit of optimism in the markets prior to the New York session. After all, the passage of the plan signaled the end of a long debate between lawmakers that was shaking the foundations of the financial markets. USD/CHF found itself rising from its .7730 record low to a high at .7857 before a worse-than-expected ISM report sent the pair back down.

Pan-fried economy

And now that we’re over all the drama in Washington, it’s time to focus on how the debt deal could impact the U.S. economic recovery.

In reaching the new debt deal, it wasn’t just the politicians who had to lose a little. The new debt deal suggests that the government now has to spend less on the economy than before, which isn’t exactly the best move to get the U.S. economy back on track.

Wasn’t it just last Friday when we all fell off our seats at the worse-than-expected U.S. GDP reading in the second quarter? Of course, let’s not forget that the unemployment rate also tipped its 9.2% high in June.

Aside from failing to extend unemployment insurance handouts and the 2% payroll tax cut, the government also plans to cut spending by $900 billion over the next ten years. Not only will this cancel out most of the Fed’s $600-billion QE2 efforts, but the lack of government support may make it even more difficult for consumers to deal with sluggish economic recovery.

So is the new debt deal really a victory for the U.S., or is it just a temporary patch that could lead to even more economic problems? We’ll probably know more about the state of the economy this week when the big NFP report is released. Don’t miss it!