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Thursday 17 November 2011
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Telegraph.co.uk Home News Sport Finance Comment Blogs Culture Travel Lifestyle Fashion Tech Dating Offers Jobs Companies Comment Personal Finance Economics Markets Your Business Olympics Business Business Club Money Deals Home» Finance» Financial Crisis America's invitation to the bond vigilantes It's got a grandiose name, but you'd be forgiven for not having heard of the Congressional Super Deficit Committee. Republicans plan to use spending cuts to axe $2.2 trillion from the debt, while the $3 trillion plan from the six Democrats leans instead on tax increases. Photo: AFP7:44PM GMT 16 Nov 2011
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Made up of six Democrats and six Republicans, it was formed in August when Congress agreed to raise America's $14.3 trillion (£9 trillion) debt ceiling. As part of that deal, Congress signed up to $1trillion of spending cuts over the next decade and established the committee to make another $1.2 trillion dent in US debt over the same period. The committee's dozen members have until next Wednesday to agree on a mix of spending cuts and tax increases to make that reduction happen.
That the deadline falls on the eve of Thanksgiving - America's biggest national holiday – could, you might hope, prove reason enough to reach a deal. What politician would want to be digesting failure along with their turkey? Fortunately the committee's 12 members have bigger motivations than a good lunch. Should they fail, automatic spending cuts of $1.2 trillion will be triggered from the start of 2013.
There's no disputing the committee's industriousness. Bunkered down in Congress's basement, it's heard from grandees who have balanced America's budget in the past and those who claim their plans can balance it again. All this work has, so far, produced two proposals.
The one from the committee's Republicans uses spending cuts to axe $2.2 trillion from the debt. The $3 trillion plan from the six Democrats leans instead on tax increases. The next seven days is about whether the two sides can find a compromise that Congress will then pass.
Away from the sweat of the Congressional bunker, hope that the committee might justify its "super" name by producing an ambitious $3 trillion to $4 trillion proposal has all but evaporated. The betting is about even on whether they can now deliver the $1.2 trillion.
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27 Oct 2011 var OB_permalink= 'http://www.telegraph.co.uk/finance/financialcrisis/8894536/Americas-invitation-to-the-bond-vigilantes.html'; var OB_Template="telegraph"; var OB_widgetId= 'AR_1'; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ""; document.write(str); }And that scepticism is reasonable. The committee has the same divisions over spending cuts and tax increases that fractured Congress in early August. But far more tellingly, it does not face any real pressure to surpass expectations and is not even under intense pressure to meet them.
That doesn't, of course, tally with the public rhetoric surrounding the committee. For Nancy Pelosi, the leader of the Democrats in the House of Representatives, this is a "golden opportunity" for the 12 members to "take their discussions to the higher ground of America's greatness".
Whatever she means, Pelosi hasn't been watching the US government bond market. Rather than lurching higher in a panic, the yield on 10-year Treasury bonds is close to a record low at 2pc. America has a number of advantages that mean an irresponsible fiscal policy can escape punishment from investors for longer than any other country.
That the dollar remains the world's reserve currency hands the US a huge edge when attracting capital. The Treasury market is also more liquid than any other. But the 2pc yield also reflects investors' conviction that nothing of substance will happen on the deficit until after the presidential election. The assumption is realistic.
The far more worrying and potentially reckless expectation is that a political consensus on how to cut the deficit will emerge afterwards. There's a good chance that the White House, the Senate and the House won't be controlled by one party after the election, opening the door to more gridlock.
Tough decisions on the deficit won't be any easier in early 2013 than they are now. Europe's crisis has shown that if governments don't take the lead, investors will. "The bond vigilantes are picking off the lowest hanging fruit and slowly moving up the tree," says Bill O'Donnell, a strategist at Royal Bank of Scotland. The risks of the US suffering its own, albeit different verision of the crisis, still seem woefully underestimated.
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Made up of six Democrats and six Republicans, it was formed in August when Congress agreed to raise America's $14.3 trillion (£9 trillion) debt ceiling. As part of that deal, Congress signed up to $1trillion of spending cuts over the next decade and established the committee to make another $1.2 trillion dent in US debt over the same period. The committee's dozen members have until next Wednesday to agree on a mix of spending cuts and tax increases to make that reduction happen.
That the deadline falls on the eve of Thanksgiving - America's biggest national holiday – could, you might hope, prove reason enough to reach a deal. What politician would want to be digesting failure along with their turkey? Fortunately the committee's 12 members have bigger motivations than a good lunch. Should they fail, automatic spending cuts of $1.2 trillion will be triggered from the start of 2013.
There's no disputing the committee's industriousness. Bunkered down in Congress's basement, it's heard from grandees who have balanced America's budget in the past and those who claim their plans can balance it again. All this work has, so far, produced two proposals.
The one from the committee's Republicans uses spending cuts to axe $2.2 trillion from the debt. The $3 trillion plan from the six Democrats leans instead on tax increases. The next seven days is about whether the two sides can find a compromise that Congress will then pass.
Away from the sweat of the Congressional bunker, hope that the committee might justify its "super" name by producing an ambitious $3 trillion to $4 trillion proposal has all but evaporated. The betting is about even on whether they can now deliver the $1.2 trillion.
BHP warns on price volatility
'Eurozone crisis risks explosion in markets'
UK to lose 'safe-haven' status as US grows
Obama tells China to start behaving like an economic 'grown up'
US Fed cuts growth forecasts for 2012
US allays recession fears with stronger growth
And that scepticism is reasonable. The committee has the same divisions over spending cuts and tax increases that fractured Congress in early August. But far more tellingly, it does not face any real pressure to surpass expectations and is not even under intense pressure to meet them.
That doesn't, of course, tally with the public rhetoric surrounding the committee. For Nancy Pelosi, the leader of the Democrats in the House of Representatives, this is a "golden opportunity" for the 12 members to "take their discussions to the higher ground of America's greatness".
Whatever she means, Pelosi hasn't been watching the US government bond market. Rather than lurching higher in a panic, the yield on 10-year Treasury bonds is close to a record low at 2pc. America has a number of advantages that mean an irresponsible fiscal policy can escape punishment from investors for longer than any other country.
That the dollar remains the world's reserve currency hands the US a huge edge when attracting capital. The Treasury market is also more liquid than any other. But the 2pc yield also reflects investors' conviction that nothing of substance will happen on the deficit until after the presidential election. The assumption is realistic.
The far more worrying and potentially reckless expectation is that a political consensus on how to cut the deficit will emerge afterwards. There's a good chance that the White House, the Senate and the House won't be controlled by one party after the election, opening the door to more gridlock.
Tough decisions on the deficit won't be any easier in early 2013 than they are now. Europe's crisis has shown that if governments don't take the lead, investors will. "The bond vigilantes are picking off the lowest hanging fruit and slowly moving up the tree," says Bill O'Donnell, a strategist at Royal Bank of Scotland. The risks of the US suffering its own, albeit different verision of the crisis, still seem woefully underestimated.
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