8/2/2011 - Debt Deal Puts U.S. on Austerity Path as Economy Falters

Debt Deal Puts U.S. on Austerity Path as Economy Falters 

The federal government looks to be getting out of the business of trying to spur the economy just as the U.S. expansion shows increasing signs of faltering.

A deal struck over the weekend to cut $2.4 trillion or more off budget deficits over a decade marks the beginning of a prolonged effort to put the government’s finances into better shape. While the immediate economic impact from the agreement is likely to be small, it will add to a reduction in growth next year of 1.5 percentage points coming from the expiration of past stimulus programs, according to economists at JPMorgan Chase & Co. and Deutsche Bank Securities.

“Over the next 10 years, there will be further spending cuts and higher taxes, and that’s not good for economic growth,” said Paul Dales, senior economist for Capital Economics Ltd. in Toronto. “It is the start of a meaningful move toward fiscal consolidation.”

The shift from stimulus to austerity coincides with a slowdown in the two-year recovery. A report last week showed that gross domestic product grew at an annual rate of 1.3 percent in the second quarter of the year following 0.4 percent in the first three months, prompting economists to warn of possible relapse into recession.

And I wonder what the revised GDP for July will be once it is made known, given the revision down from 1.9 per cent to 0.4 per cent for June. 

The economy will suffer another blow next year with the expiration of a temporary 2 percent payroll tax cut, an end to extended unemployment benefits and completion of the $830 billion stimulus program that President Barack Obama signed into law more than two years ago. Obama will press Congress to extend a cut in payroll taxes before the end of the year, White House press secretary Jay Carney said yesterday.

So now that the debt ceiling has been raised (well assuming it will pass the Senate today) and it brings some level of assurance that crisis has been averted, I wonder now if things are really going to start heading downhill with adverse economic developments outside the immediate control of congress? That is, we'll begin to see a cascade of bad economic news particularly in the US and Europe, and throughout the global economy, creating what is often referred to as 'the perfect storm', a continual slowing and demise of the world economy until it falters. 

Should such a scenario unfold, sooner or later, it would remind me of the movie The Titanic (I know a little lame but hey) where it finally becomes apparent and dawns upon everyone that this is no long just an unsinkable ship that has sustained damage from hitting and iceberg and filling with some water until such time a rescue boat or some other fix is implemented, but this baby is really going down and there's SFA we can do about it! Well, of course, time will tell.