DC Rhetoric Rule Number 67b/YxW2

November 22nd, 2011 at 5:09 pm

Be very wary of this admonition: If we do X, the markets will punish us.

Chins were pulled and fingers wagged as stern warnings went out that the failure of the supercommittee would result in terrible difficulties financing our government debt.  Interest rates would rise, just like after the S&P downgrade.

“Oh…right…well, maybe not like that, but I’m tellin’ you folks, we got trouble..right here in River City…with a capital T and the rhymes with P and that stands for…”   See here.

I’m not saying a day or two is decisive, and in fact, equity markets have slid over the last couple of days, though they’re understandably skittish for lots of reasons.  But, from the Bloomberg article accompanying the figure:

Stocks dropped as the supercommittee’s failure to agree on deficit reduction of at least $1.2 trillion means a like amount of automatic across-the-board spending cuts will be triggered in 2013. The Standard & Poor’s 500 Index fell as much as 2.7 percent before closing with a loss of 1.9 percent.

“Across-the-board cuts are worse for growth,” said Dominic Konstam, head of interest-rate strategy at Deutsche Bank AG in New York. “It’s going to be worse for stocks than it is for Treasuries. If anything, Treasuries are going to rally.”

That’s right.  Cuts hurt growth at a time like this, or more precisely, at a time like 2013 (that’s when the cuts kick in) when unemployment will still be highly elevated.  We continue to worry about precisely the wrong things.


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2 comments in reply to "DC Rhetoric Rule Number 67b/YxW2"

  1. foosion says:

    >>Cuts hurt growth at a time like this>>

    I keep hearing the R drumbeat that raising taxes kills jobs. Where’s the D drumbeat the cutting spending kills jobs or even that firing government workers is killing jobs?

  2. Cat says:

    “We continue to worry about precisely the wrong things.”

    “We”, the plurality of the American people, are worried about jobs and economic growth not the deficit. Or do you mean “We” the upper echelons of American society who are deathly afraid of the inflation a proper economic recovery would bring?

    I would be afraid of inflation as well if I was part of the wealthy who inherited their riches and I had no personal ability to grow my wealth since inflation would make me feel poorer.

    I would be afraid of inflation as well if I was an over paid CEO or executive as inflation drives up my labor and materials costs which is the only part of my business I’m able to control due to my lack of skill.