You’ve probably heard about the U.S. debt ceiling crisis, and some of the steps the government has taken to solve it. The media has floated around a lot of terms, like “super-committee” and “trigger mechanism”, and unless you have followed it closely, it can be hard to know what is really going on.
Last summer Congress was embroiled in a bitter debate about the U.S. public debt nearing the so-called “debt ceiling”: the utmost limit that the public debt is allowed to reach. Normally, the ceiling is decided each year by Congress with a minimum amount of fuss. However, this year the decision was made only after intense arguing in Washington. On August 2nd, Congress voted in favor of, and Pres. Obama signed, the 2011 Budget Control act, which raised the ceiling by $400 Billion thru 2013. This averted the only U.S. default in history.
Raising the debt ceiling was not the only thing the Budget Control Act did. Recognizing that the solution was temporary, Congress also mandated a deficit reduction plan that would find $1.5 Trillion in budget cuts over the next decade. To come up with this plan, Congress authorized the formation of a special committee titled, The Joint Select Committee on Deficit Reduction, referred to in the press as the ”super-committee”, comprised of 12 members total, 6 each from the Senate and House, 6 Republicans and 6 Democrats. Because of the small size, as compared to the 535 members of congress, it was thought the committee would be better able to come up with a plan that would satisfy both parties, with more cooperation and less partisanship. The committee’s plan would be recommended to Congress as a whole, and it would be immune to most of the tactics politicians use to stall a bill they don’t want passed.
Unfortunately, the committee failed. By November 21st, the committee admitted that no plan could be decided upon, and indeed much of the committee’s time seemed to be spent pointing fingers at each other.
As you can imagine, the markets didn’t take the failure very well. Before the committee had even announced the news, all three major indexes fell more than 2%, based on rumors of the impending admission, following an extremely volatile market over the summer. No one can predict what the markets will do next, but I think it’s a safe bet that as long as Congress seems incapable of action, investors will continue to be jittery. Another worry is that credit-rating agencies like Moody’s and Fitch will downgrade the U.S. debt, much like the S&P did back in August. While it’s unknown what direct consequences these downgrades might have, it’s certain that they would contribute to the public’s lack of confidence in the economy, thereby driving the markets even lower.
Similarly, we don’t know what Congress will do next. The Budget Control Act specified that, should the committee fail to come up with a plan, across the board spending cuts equaling $1.2 Trillion would be automatically enacted. This is the “trigger mechanism” you might have heard about. While these cuts would reduce the deficit, it’s not something either party wants. “Across the board” means cuts would come from both defense and non-defense spending. Given that 2012 is an election year, neither party wants programs they consider sacred to lose out. It’s possible that Congress will attempt a handoff and vote to eliminate the cuts, meaning the debate will be postponed, yet again, for another year.
It’s hard to find any silver lining in this news, we don’t know what the markets will do, and we can’t control what Congress does, or doesn’t do.
I don’t have a crystal ball, but I do have some ideas to help protect your money. It might be a good time to review your portfolio, and your financial plan.