After a last-minute agreement finally brought the stalemate over the nation’s debt ceiling to a close, President Obama signed the Budget Control Act of 2011 into law on August 2, 2011, enabling the U.S. Treasury to avoid defaulting on existing obligations.
The Budget Control Act of 2011 left all sides with plenty to argue about over the next few months. In addition to increasing the debt ceiling, it would bring down the federal budget deficit by an estimated $2.1 trillion over the next ten years. It also sets the stage for more debate over how to achieve that $2.1 trillion reduction, focusing on spending cuts rather than increased revenues. Here are some of the key provisions.
Debt ceiling will be increased in stages
The $14.3 trillion debt ceiling will be increased immediately by $400 billion, and by another $500 billion after September. The increases will allow the Treasury to pay bills without interruption after August 2.
Assuming deficit reduction measures are adopted by the end of the year, an additional $1.2 trillion to $1.5 trillion in borrowing authority will be available in 2012, which is believed to take care of the Treasury’s needs until 2013. Though Congress could vote to disapprove the additional borrowing authority, that action could be vetoed, which would prevent a rerun of the recent uncertainty.
Immediate limits are imposed on discretionary spending
Caps on domestic and defense spending will cut an estimated $900 billion to $1 trillion–roughly the same amount as the initial increase in the debt ceiling–from federal budgets over the next decade.
Joint congressional committee will seek $1.5 trillion in additional deficit reduction
A special joint select committee of 12 Democrats and Republicans from both the House and Senate will be charged with finding ways to reduce the deficit by an additional $1.5 trillion. The committee, which must be appointed within two weeks after the legislation is signed, is directed to report its proposals by November 23, 2011; by December 2, it must submit legislation to implement them. Both houses of Congress must vote on that legislation, which cannot be amended, by December 23.
Additional spending cuts, 2012 debt ceiling increase tied to deficit reduction agreement
The joint committee’s deficit reduction proposals will determine the amount of an additional increase in the debt ceiling. If the committee’s proposals are approved by Congress, the debt ceiling will be increased in 2012 by the amount saved by the deficit reduction measures. If the committee cannot agree on how to cut the deficit by at least $1.2 trillion, or if Congress doesn’t approve the committee’s proposals, the new debt ceiling increase would be limited to $1.2 trillion.
To try to prevent gridlock on the committee, failure to agree on at least $1.2 trillion in deficit reduction would automatically trigger an additional $1.2 trillion in broad-based spending cuts beginning in January 2013. The cuts would apply to both defense spending, such as the Departments of Defense and Homeland Security, and to nondefense spending, such as payments to Medicare providers. However, Medicare cuts would be limited to 2% of the program’s cost, and programs such as Social Security, veterans benefits, food stamps, and Supplemental Security Income (SSI) would be exempt.
Balanced budget amendment would give authority to increase debt ceiling
President Obama also would be granted immediate authority to increase the debt ceiling by $1.5 trillion if Congress were to pass by year’s end a constitutional amendment requiring a balanced budget. Such an amendment also would need to be ratified by three-quarters of the states.
Subsidized loans for graduate students eliminated
Subsidized-interest Stafford Loans for graduate and professional students (other than those in state-required teaching or certification programs) will end after July 1, 2012, though unsubsidized loans will still be available. The Act also adds $17 billion in mandatory funds over two years for Pell Grants to compensate for the funding gap.
Compliance approved: 2011-005539
Bountiful, UT 84010
Markets Tumble on Signs of Weakening Global, U.S. Economies
August 5th, 2011Stocks fell sharply yesterday around the world, accelerating a widespread decline that began as the United States approached the August 2 deadline for averting default and then resumed with even more intensity after a brief rally when a debt/budget deal was reached in Washington. On Thursday, the Dow Jones Industrial Average fell 512.76, or 4.31%, while the broader S&P 500 dropped 60.27, or 4.78%, and the tech-oriented Nasdaq declined 136.68, or 5.67%.
At today’s close of 1,200.07, the S&P 500 has now slumped almost 12% from its April 29 closing high of 1,360.14, putting the market into what Wall Street considers a “correction” – generally defined as a pullback of 10% to 20% (declines greater than 20% are considered bear markets). For perspective, the market experienced a 16% correction in the summer of 2010 before rebounding after Fed Chairman Ben Bernanke announced the monetary stimulus policy widely referred to as QE2.
Although investors were cheered that the U.S. did not default, their focus quickly moved on to intensifying concerns that leaders both here and abroad have not done enough to address weakening economic growth both in the U.S. and globally. In the U.S., recent economic reports have raised fears that the U.S. economy might be in danger of tipping over into a recession. In Europe, a second major rescue package for Greece did not reassure investors, who have begun to focus on the debt problems confronting the much larger and more important economies of Italy and Spain. Investors there drove British stocks down 3.4%, while in Germany, the DAX index dropped 3.4% and in France, the CAC 40 closed down 3.9%.
Today’s action shows that investors are fleeing so-called “risk assets” such as stocks in favor of other asset classes they perceive as safer. Upcoming reports on U.S. employment and other economic trends will play a large role in determining whether investors can regain their confidence in the near-term.
For additional insights on the current economic situation, check out the most recent edition of Professionally Speaking featuring Raymond James Chief Economist Scott Browth, PH.D. You can access this audio presentation by visiting http://marvinellis.com/event.php?id=24&e=captainslog.
We want to assure you that we are following the markets closely and will of course continue to do so. While declines of this nature are obviously a matter of concern, it’s also very important not to overreact. If you have any concerns about the current investment climate, please give us a call.
Compliance approval M11-1672
Tags: 2011, Market Outlook
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