President Barack Obama, along with Congressional Republicans and Democrats are close to a grand debt deal.
The nation's leader now have their sites set on a grand federal deficit reduction package of more than $4 trillion over 10 years - a sweeping plan that would modify entitlements and implement major changes to the tax code, The Wall Street Journal reported Friday.
And, as investors/readers might sense, achieving the above grand debt deal will require political pain on both sides of the aisle - i.e. cuts in programs preferred by Democrats and Republicans. That means cuts to entitlement programs such as Social Security, Medicare, and Medicaid for Democrats; and cuts to defense spending for Republicans. There would also be substantial reductions in tax breaks and deductions for businesses.
The restructuring of both Medicare and Medicaid were expected by public policy analysts - given the need to get rising health care costs under control. However, if changes to Social Security's benefit formula are combined with substantial U.S Department of Defense cuts and curtailing of tax code loopholes -- the deficit reduction / debt ceiling agreement could approach landmark status.
However, investors/readers should keep in mind that any deficit reduction deal still would have to pass a divided Congress, but the conventional wisdoms argues that if the nation's two top leaders -- President Obama for the Democrats and House Speaker John Boehner for the Republicans - can accept the painful spending cuts and tax increases necessary to stabilize the nation's finances -- then there caucuses will be obliged to follow-through and take the distasteful, but necessary medicine.
Beyond that, Congressional Republicans and Democrats may be 'encouraged' by U.S and global credit markets to accept the deficit reduction package as the July days run out.
That's because the U.S. Government borrowing authority ends on August 2. A failure by Democrats and Republicans to reach a deal on the debt ceiling could result in an event most economists for decades thought was unfathomable - a default by the largest and most technologically advanced economy in the world.
On August 4, the U.S. Treasury Department is due to pay off $30 billion in maturing short-term debt. In theory, the United States could prioritize debt payments, but U.S. Treasury Secretary warned lawmakers in Congress Wednesday that the prioritization tactic would still cause investors to shun U.S. Treasury securities, commonly known as Treasuries.
Geithner has also repeatedly underscored that failing to raise the debt ceiling will have no constructive outcomes for the nation's fiscal condition, the task of deficit reduction, and U.S. and global stock and bond markets.
Further, the major credit rating agencies -- S&P,Moody's Investors Service, and Fitch Ratings -- also have said a failure to raise the debt ceiling may have an adverse effect on global confidence in American securities.