By now, everyone has heard of the “supercommittee” that Congress set up last summer to negotiate a serious deficit reduction package that individual Congressmen could not risk being associated with. We are seeing more and more mention of the supercommittee in various investment newsletters and client notes, as well as on the pages of Seeking Alpha. There has even been talk of another sovereign credit downgrade if the committee fails to reach consensus. Moreover, anyone who watches TV or listens to the radio can see that firms with profits at stake have been pouring millions into sappy, don’t-cut-this-or-that-program advertisements. In short, people with money are taking the committee into consideration.
With its work set to wrap up in two weeks, let us examine the prospects for the committee’s success.
First, unfortunately, there is zero chance that the supercommittee will get to serious deficit reduction. Although holding down the social security COLA, promising (as always) to reduce Medicare fraud, and counting imaginary savings from not staying in Iraq or Afghanistan forever is not what the supercommittee was set up to do, that seems to be the most likely outcome at this point. Closing some corporate tax loopholes is another possibility, which would provide a means for raising modest additional revenue without violating any no-new-taxes pledges. However, European-style austerity—with immediate, tangible reductions to pensions, benefits, central government support for local budgets, spending on consultants, as well as military outlays—is simply not in the cards. It is unlikely that the supercommittee will recommend so much as one government office, one program, one initiative for termination. Moreover, even if the proposed $1.3 trillion-over-ten-years in cuts actually took place, we must remember that the deficit is running at around $1.3 trillion annually. So this was never a serious discussion in the first place.
Second, the “automatic” cuts that are supposed to take place if the supercommittee does not do its job, are really not automatic at all. There is no way that Congress, today, can legally bind itself to doing or not doing something, tomorrow. Anyone familiar with Congressional practice and with our Constitution knows that all the “automatic” talk was nonsense from the get-go. As for “sequestration”, a rare term that has entered the discourse over the last few days, the fiscal procedure that it describes is almost wholly conceptual, having never been implemented on a large scale. It would be extremely difficult for Congress to order the Administration to withhold tens of billions of dollars that Congress itself has appropriated. It might even be unconstitutional. And regardless, any "cut" through sequestration would likely amount to either a temporary or, at most, a one-time withholding of appropriated funds, rather than a permanent spending reduction.
So really, this is all just a big dance. No doubt the people directly involved are taking it seriously and working long hours to produce some kind of result. However, in the big picture, it will not make any difference whatsoever. There will be no “automatic” cuts, no real spending reductions, and our national debt will keep growing at its present rate, if not faster due to compounding interest. European-style austerity will not come to the USA in the near-to-medium term.
Does that matter? Presently, it does not. The ongoing circus in Europe continues to raise the “risk-free” appeal of U.S. sovereign debt. This means that despite the recent S&P downgrade, there is now very little pressure on America to get its purse in order. In fact, the potential imminent disintegration of the Eurozone is a gift for Washington and for all Americans who rely on government for some or all of their subsistence. Even if S&P were to get frisky again in the near future, the bond market would not take it seriously, just as it scoffed at the last go-round. So Washington really is off the hook for now, and anyone who predicts some kind of near-term bond market consequences is deeply mistaken. Moreover, healthcare, energy, and other industries concerned about reduced profitability from reduced government cheese can rest easy—we are back to business-as-usual. In short, we can expect no immediate market or economic repercussions of any sort from any action proposed or not proposed by the supercommmittee.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.