Debt deal reached

A debt deal will be signed into law today that will raise the debt ceiling, cut spending and end this insane few weeks of uncertainty for the world. The terms of this deal are not great but definitely better than nothing at all which would result in the U.S. defaulting on its debt. The deal will cut about $900 billion in spending over 10 years and raise the debt limit by about that much as well. Then it calls for a committee of 12 people (6 Republicans, 6 Democrats) to come up with additional budget reductions of about $1.2-$1.5 trillion sometime in November or December of 2011. Once this is agreed to by Congress and White House, the debt limit will be raised by that same $1.2-$1.5 trillion amount.

Where this gets interesting is if the government can not agree to those additional reductions. If that does occur, then automatic cuts to the defense budget and domestic budgets will take place. The cuts will be too big and are designed to force both parties to agree on the committee’s recommendations (and for the committee to come to some agreement themselves).

What is unfortunate is that during all these negotiations the leaders in Washington had over the last few weeks, an actual good deal was almost reached. At one point the President and Speaker of House John Boehner (Republican) agreed to a deal that would reduce the debt by $4 trillion and included raising the tax on the richest 2% of Americans back to where they were under President Clinton (a few per cent higher than today). It also would close tax loopholes and credits for oil companies and other corporations. This deal was eventually rejected by the extreme right wing of the Republican Party (the Tea Party).

Due to the way this deal is structured, there is still some uncertainty left in the market until the end of the year. Hopefully at that point those taxes on the rich will go up to where they should be and both parties can agree on other smart debt reducers that will avoid the massive cuts which would take their place automatically. This deal is not great, but better than nothing.