debt ceiling deal

Political Posturing Continues as Debt Deadline Gets Closer

Congress remains sharply divided on how a debt ceiling deal should be done as each party is pursing their own budget plans. These separate plans are all but guaranteed to fail as they are unlikely to garner broad support. As the August 2 deadline gets closer, investors are beginning to worry that a credit rating downgrade will happen and even a complete default. We may see major panic selling occur if there isn’t some progress on a debt ceiling deal by mid to late week.

Following the breakdown in negotiations over the weekend, the two parties are formulating their own plan for addressing the debt ceiling deal.

The Republicans, which after the most recent elections are being driven by the Tea Party movement, are strongly against any tax increases. Republican House Speaker John Bohener’s plan would raise the debt ceiling stages that way Congress would have to revisit this potentially dangerous political issue again before the next election.

The Democrats are strongly against any proposed cuts to popular social programs such as Medicare and Social Security. They want to do a combination of eliminating tax loopholes and spending cuts. Senator Harry Reid’s plan would raise the debt ceiling by $2.7 trillion and an equal amount of spending cuts over the next 10 years.

Secretary of State Hillary Clinton tried to reassure Asia in a speech in Hong Kong, saying “I’m confident that Congress will do the right thing and secure a deal on the debt ceiling and work with President Obama to take the steps necessary to improve our long-term fiscal outlook.” Asia holds nearly $3 trillion in U.S. government debt with China holding the most.

Ben Bernanke said that the U.S. defaulting would be a “calamitous outcome” for the U.S. and the global economy.

The markets are down today, but not as bad as it could be. Each index is down about a half a percent entering midday trading. The market will start reacting very negatively though if there isn’t some major progress this week. Gold hit another record high as investors look to put their money into something safe.

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