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What does the Super Committee failure mean?

December 06, 2011

| MoneyRates.com Senior Financial Analyst, CFA

The failure of the so-called Super Committee, a congressional group assembled to make bi-partisan deficit reduction recommendations, wasn't much of a shocker. Its performance was on par for an increasingly dysfunctional Congress. Still, its failure could be a costly one for the American people.

It's hard to say exactly what will happen next, but none of the implications of this failure are good. Here are some of the possibilities:

  1. Slamming on the brakes. In the absence of a deficit reduction plan, the default position is for $1.2 trillion of automatic cuts to kick in beginning in 2013. This kind of abrupt, drastic cut in government spending would be like slamming the brakes on the economy. Already, the government sector has been steadily shedding jobs, and a sharp cut in spending would further add to the unemployment problem.
  2. Inflation. At some point, the global markets will tire of the fiscal irresponsibility of the American government. The U.S. dollar may be firmly entrenched as the world's reserve currency, but the government can only neglect its duties for so long before the country starts to lose credibility in the international financial community. If the value of the U.S. dollar suffers as a result, it could fuel inflation as import costs soar.
  3. Higher interest rates. Another way that a loss of credibility for the US could manifest itself is in higher interest rates, as global investors become more wary of U.S. bonds. This could start to counteract the Federal Reserve's effort to stimulate the economy through lower interest rates. The consequences of this might not be all bad, though. After all, current mortgage rates have gotten down to 4 percent without reviving the housing market, so the stimulus of low interest rates might not be missed all that much. Meanwhile, higher incomes on savings accounts, CDs, and money market accounts would be welcomed by bank depositors.
  4. A market debacle. Any bad news on the economic front could hit the stock market hard. This would drain more wealth from the economy, and provide yet another setback to people trying to build retirement savings.
  5. Wait 'til next year! The Republican strategy seems to be to resist doing anything until the 2012 presidential election, and both parties are guilty of putting politics ahead of progress by designing a plan whose consequences (the automatic budget cuts in 2013) wouldn't go into effect until after that election. The assumption seems to be that the outcome of that election will somehow allow the government to start functioning again, but is there any reason to believe that's true?

Given the political circumstances, perhaps the Super Committee was doomed to failure all along. But by going through the motions over the last couple of months, it did succeed in one thing--wasting time that the economy can ill afford.

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