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.