What part of current American politics does the market still not get?
Any investor with an ounce of acumen should have known that the so-called supercommittee of Congress charged with coming up with a $1.2-trillion (U.S.) deficit reduction package was set up to fail. A mere look at its membership could have told anyone that, with some of each party’s most hardened ideologues appointed to negotiate.
What’s more, there was simply no pressure on the group of 12 senators and congressmen – six from each party – to meet Monday’s de facto deadline for a deal.
The automatic spending cuts that would be triggered in the absence of an agreement do not kick in until 2013, giving Congress plenty of time to replace them with ones that take the sting out of scheduled defence cuts.
Indeed, that’s what Republicans have been counting on all along. They are banking on public concerns about national security and misgivings among moderate Democrats about the wisdom of cuts that even the White House considers dangerous.
The market’s immediate reaction on Monday, while a surprise, likely reflects the uncertainty investors feel about the fate of more than $100-billion worth of payroll tax cuts that are set to expire at the end of the year. A supercommittee deal might have included their extension for another year, as the White House had sought.
Instead, Congress is likely to go down to the wire in debating the payroll tax cuts in December, proving once again that nothing in this town gets done unless it has to.