The Independent Investor: The Super Committee

In less than two weeks, the U.S. Joint Select Committee on Deficit Reduction is supposed to come up with a list of recommendations to cut the country's deficit by at least $1.2 trillion. Will this Super Committee make their Nov. 23 deadline? Don't hold your breath.

By now we should be well acquainted with these binary events. You know these do or die, pass or fail decisions that promise to send us all to Nirvana or Armageddon every other week or so. This year we've lived through the U.S. deficit reduction/debt ceiling 11th hour deal, the will-they-or-won't-they credit rating downgrade of our sovereign debt, the two-year-old Greek tragedy, the EU bailout plan and more recently, Italy's antics.

What is really at stake in this Super Committee decision? As readers may recall, the Republican Party originally demanded a deficit reduction package before agreeing to an increase in the country's debt ceiling. In August, an austerity package of cuts worth $2.4 trillion was announced by the Obama administration.

At the 11th hour, both parties agreed to raise the debt ceiling and set up a committee charged with coming up with a deficit reduction compromise by Nov. 23. Failure to do so will automatically trigger cuts of $600 billion in Washington's two sacred cows—defense (Republicans) and entitlements (Democrats) beginning in 2013. But none of these efforts were enough to stave off a reduction in U.S. debt rating by the credit agencies, which happened on Aug. 6.

Many pundits had warned that markets would collapse around the world if and when we lost our triple "A" credit rating. None of that occurred. In fact, markets rallied and rates declined. Yet, party leaders swear up and down that they feel duty bound to uphold the automatic cuts if the Super Committee fails to come up with a deal. At the same time, 100 House members of both parties are urging the committee to "think big" and expand their deficit reduction efforts to $4 trillion or more. It all sounds to me like more of the same — political theatre with little substance — a legacy of this do-nothing congress.
 

Wall Street is fairly cynical about the "automatic" 2013 cuts and with good reason. Remember, new federal elections will occur in November of next year. It is doubtful that a new Congress and Senate will just sit back and watch this indiscriminate $1.2 trillion reduction of these two important programs.

If the worst happens and no Super Committee deal is forthcoming, how bad would it be?

The credit agencies could use that as an excuse to ratchet down our debt rating again. But given the results of the first reduction in our credit rating, I'm not sure that another one will have much impact, especially given the turmoil occurring in the rest of the world.

It was also interesting that the markets declined on the news of a $2.4 trillion austerity deal in August but not on our debt downgrade. That tells me the markets are far more concerned with economic growth and the high rate of unemployment than they are with the nation's deficit. I'm all for reducing the deficit when the economy is strong enough to withstand the hit. But now, while the economy is still floundering, is not the time. I suspect that the deadline will come and go with little in the way of compromise and the markets will disregard the entire exercise.
 

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.