Sunday, 20 November 2011

The $1.2 trillion deadline: 23 of November

We are approaching a big day, ladies and gentlemen. It is the 23rd of November when US budget committee will have to agree on budget cuts of at least $1.2 trillion dollars over the next decade. The 12 members of the committee, both Republican and Democrats, will have to decide on measures that would curb spending and increase the fiscal intake. While the US public debt recently crossed the $15 trillion yardstick, and the  $54.5 trillion total government debt which includes unfunded liabilities like Medicare, Medicaid and toxic mortgages still held at Freddie Mac and Fannie May still in full swing, it is business as usual in Washington.

Another political circus on the 23 Nov

Last time the budget approval procedure was due, the sheer display of political stupidity was at large. Democrats would like to see tax increases on high-income earners while the Republicans would like to obtain tax cuts, as part of a stimulus effort. While this is a more complicated discussion, I would certainly want to see the budget deficit gap shrunk by lowering the government expenses and less by increasing taxes.

On that occasion, the credit rating agency S&P decided to downgrade US sovereign debt from its historical AAA rating to AA+, down a notch. The markets reacted sharply as investors rushed out of risk-off instruments into the so-called "safety" of US bonds. The yield on the benchmark 10-year Treasury note fell from 2.56 percent on Aug. 5 to below 1.72 percent on Sept. 22. The yield on the 10-year note was at 2.01 percent at 5:14 p.m. on Friday, Nov. 18.

The S&P opened lower $1210 and is currently trading around $1206. While it may fill in the gap towards Friday's close of $1215, the bearish sentiment will be the main driver of prices this week. 

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