POTENTIAL MELTDOWN (5)

When I was in the U.K., I said to my friend that I didn't think that the U.S. Congress would do a deal allowing an increase in the Federal debt ceiling before the deadline of 2 August. However, at the absolute 11th hour (President Obama signed the bill on the very last day), they managed it. I was wrong.

Or was I? The deal allows a 2-stage increase in the debt ceiling of US$900 billion in return for spending cuts of US$917 billion. However, US$900 billion is not much more than a drop in the ocean, given the current parlous state of America's public finances. So a 12-man congressional committee, made up of six Democrats and six Republicans, is due to find a further US$1.5 trillion in spending cuts by the end of this year, in return for a similar increase in the debt ceiling. If they can't agree on the cuts, or if Congress doesn't approve them, then US$1.2 trillion of cuts will automatically come into play.

The deal solves the immediate problem, but is an agreement to reach an agreement a real agreement? Given recent events, the likelihood of an agreement on spending cuts seems small. True, deadlock will bring automatic cuts. But Congress can always change its mind on that. Furthermore, everyone outside Congress seems to agree that US$2.4 trillion of future cuts is not enough to solve the country's problems. US$4 trillion is the consensus figure; but since that can only come about if tax increases/elimination of tax breaks are brought into the mix, the one issue which Republicans adamantly refuse to countenance, no real solution is on offer.

That last fact brought a swift response. Standard and Poor's, one of the three main rating agencies, cut the U.S. credit rating from the hallowed AAA, for the first time in history; and then downgraded the debt of the huge state-backed mortgage lenders Fanny Mae and Freddie Mac. Stockmarkets fell, and have been falling since.

So was it a real deal? Not in my view.

Walter Blotscher