I find it almost comical that America is so obsessed about this $1.5 trillion spending cut initiative. After all, we already have a $14 trillion national debt (which excludes another $1.2 trillion in state debts and $1.7 trillion in local municipalities' debts), and these targeted debt reductions are to be implemented over a 10-year timeframe. That's hardly a drop in the bucket.
What really raises my ire, however, is my sense that a bunch of accounting gimmicks may lead the JSC to proclaim that it has achieved its deficit reduction target. For instance, as much as $300 billion in deficit improvement can be attained over the next 10 years by using "chained CPI" as opposed to the current CPI measure when indexing federal entitlement benefits and tax thresholds. In other words, substituting this lower chained CPI figure means less dollars going to beneficiaries and more citizens paying higher taxes at a lower level of income in the future.
Given such low expectations for the JSC, we are at the crest of an ironic moment in U.S. financial history. A larger-than-expected agreement may lead to a relief rally in "risk assets" on Wall Street. Imagine that: the U.S. government acts like an adult to address some of its structural, long-term debt ills, and the bond markets respond by raising yields on U.S. Treasury bonds.
Conversely, should the JSC fail to reach an agreement, the resulting bitter disappointment and fear of a deadlocked Congress could lead to an increased aversion to risk and a flight to quality such that U.S. Treasury bond yields would fall (and a self-propelling U.S. recession might follow as well).
Ironic, isn't it? Perhaps this seems counter-intuitive to you. If so, welcome to the emotional roller coaster that many investors have experienced this year in the global bond and stock markets. Stay tuned.