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Debt Ceiling Compromise Is the Opposite of a Cure

Updated from 8:09 a.m. ET Wednesday, Oct. 16, with current information on the compromise.

NEW YORK ( TheStreet) -- Harry Reid, the Senate Majority leader, has made a terrible miscalculation that we're all likely to be paying for both in dollar amounts and in increased personal stress, perhaps for years.

The bill he has negotiated with Republican Senate Leader Mitch McConnell has ended the political stalemate. House Speaker John Boehner encouraged his Republican caucus to accept the measure as a bipartisan compromise, but even so, it took the Democratic caucus to make it happen. It was approved by the House late last night and signed immediately by President Obama.

Sadly, Reid's solution is by its own definition merely a temporary relief that will only bring more and greater pain later. More importantly, his act of compromise further validates the practice of holding the raising of the debt ceiling hostage in a partisan struggle, keeping it as a warhorse in the House stable to be trotted out whenever that body finds itself in opposition to a presidential administration. If history is any indication, any discomfort you feel now will be doubled the next time around.

Granted, the White House and the Democrats got the better deal. The Republicans got only a nod to their demands. But that nod is encouragement enough.

Tensions among the general population began to run high as the deadlock between House Republicans and the White House continued into its second week and they have slowly escalated. The now-imminent debt-ceiling deadline has added urgency, and an air of looming crisis, to the standoff.

The shutdown, by itself, is by now no longer merely a nuisance. Its immediate effect hits the pocketbooks of 800,000 government employees and some uncounted number of vacationers who can't visit the national parks. But its outward ripples have also begun to hit businesses that take in money from those employees and vacationers. It's begun to hit private businesses that supply the government, like Boeing (BA) and Lockheed Martin (LMT) and United Technologies (UTX), all of whom have laid off thousands in the last two weeks. It's hit other airlines, who need government inspectors for their planes. It's begun to hit the stock market, where investors have remained cool on the surface, but have begun quietly investing in funds tied to the CBOE Volatility Index as a hedge against the hour when things go to hell very quickly -- iPath S&P 500 VIX Short-Term Futures ETN (VXX) has seen a 50% spike in its average daily volume.

The shutdown has directly and indirectly harmed the economic recovery. A recent study by Macroeconomic Advisors estimates fourth-quarter growth this year will be reduced by 0.3% as a result of a two-week shutdown.

More importantly, prior to Wednesday's Capitol Hill deal, in a population still smarting from a long, drawn-out recession, the awareness had been steadily growing of the potential for catastrophe as the U.S. were to fail to meet its debt obligations over a political stalemate, sending both the domestic and global economy into a fresh tailspin. That same Macroeconomic Advisors study speculates that the small economic growth we have been experiencing would stagnate until the end of 2014 in the event of even a brief technical default. It's easy to imagine what that would mean to those currently still unemployed, marginally employed or struggling from paycheck to paycheck.

JPMorgan's (JPM) Jamie Dimon has said that to default on U.S. debt during the tentative beginnings of a global economic recovery would be to "shoot ourselves in the foot."

Deutsche Bank head Anshu Jain said a default would spread like a "rapidly spreading fatal disease."

The International Monetary Fund's Christine Lagarde said, "If there is that degree of disruption, that lack of certainty, that lack of trust in the U.S. signature, it would mean massive disruption the world over."
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