Guest post written by Hillary Elder,Director, Money Market Strategies, HighMark Capital Management
In November 2011, after months of debate, Congress was unable to arrive at an agreement to gradually reducethe U.S. deficit. As a result, they deferred any decision by implementing a process called sequestration, scheduledto take effect in January 2013. This draconian option was thought sufficient to motivate both political parties tofocus on resolving their differences. It was never intended to actually take effect, as it will trigger across- the- boardspending cuts of $1.2 trillion over 10 years to both domestic and defense programs.
Since that time, there has been no progress on dealing with the nation’s long term budget problems as partisanshipand electioneering have prolonged the stalemate. The hope is that following next month’s election lawmakers willrefocus to tackle this issue. There is also the expectation that discussions will need to be held as soon as February2013 regarding once again raising the statutory debt ceiling from the current $14.7 trillion. Last month, beforeleaving to campaign, Congress passed a six month continuing resolution to fund the U.S. government throughMarch 2013.
There has been some posturing about allowing the economy to go over the fiscal cliff; thereby allowing the Bushtax cuts to sunset and setting the stage to extract revenue concessions. There has also been talk about the politicalparties negotiating a compromise that effectively amounts to finding a way to kick the can down the road onceagain. Both would be viewed extremely negatively by the major rating agencies. Three of the Nationally RecognizedStatistical Rating Organizations have already weighed in with strong words as to the likely impact on the country’scredit rating should a credible plan not be forthcoming. Recall that in August 2011, after an acrimonious battle overraising the U.S. debt limit, Standard and Poor’s Corporation downgraded the U.S. long-term credit rating from AAAto AA+. To date they have been the only agency to take this action.
