US Debts Ceiling Talks Update: Two Rival Plans26 July, 2011, 10:47. Posted by Zarathustra
Tags: Debt Ceiling, Debt Crisis, Economy, United States
After the talks broke down over the weekend, the two parties were working on their own plans.
John Boehner, Republican and the Speaker of the House, talked about the plan which reflects the “cut, cap, balance” principles (via Business Insider). It would raised the debt ceiling in two instalments, to cut deficits by as much as US$3 trillion over the next 10 years without tax increases. The plan is to cut US$1.2 trillion of spending immediately over the next 10 years, which would trigger the rise in debt ceiling by US$1 trillion. Then the Congress will have to pass an additional deficit reduction plan of US$1.8 trillion over the 10-year period, which will then allow the debt ceiling to be raised by another US$1.6 trillion.
Harry Reid, Democrat and Senate Majority Leader, unveiled his own plan which would raised the debt ceiling in one-go by US$2.7 trillion with the same amount of cuts (via Business Insider). There would be US$1.2 trillion cuts in discretionary spending, US$1 trillion saving from withdrawing from wars in Iraq and Afghanistan, and other cuts. Crucially, this plan comes with no tax increases as well.
None of the plans is anywhere close to the US$4 trillion that President Obama wanted to get, and not quite close to the number that rating agencies would like to see, which is also US$4 trillion. In addition, the John Boehner’s plan introduces additional uncertainties as it raises the debt ceiling in two instalments, which implies that we might see all these politicking all over again when the US government hit the debt ceiling once again. Don’t forget that it will be the year for Presidential election next year. That’s why the President would favour Harry Reid’s plan.
Right now, of course, with no real thing in sight, investors start to panic somewhat. Dollar falls while haven assets like Swiss Franc and gold rise, though there is little sign of panic in equities. In the bond markets, the US Treasury 10-year yield is now back above 3%.