Analysts: Debt Deal May Worsen Economic Problems

Tuesday, 02 Aug 2011 12:24 PM

By Michelle Smith

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Critics of the debt ceiling deal view the plan as a quick fix ... but only for a certain group of problems, such as paying the nation's bills and temporarily avoiding a credit rating downgrade.

“It represents, in our view, just a Band-Aid approach on the way to more sustainable public finances,” the analysts at Barclay's Capital reportedly wrote in a research note obtained by the Washington Post.

The Post reported the deal “doesn’t go nearly as far as financial analysts and some senior officials had hoped toward reining in the national debt later this decade.”

But even more concerning than the checks that the United States will have to write in 10 years are the current structural problems that haven't been addressed.

"We are still in a scenario where we have very slow growth, high unemployment and that's very uncomfortable for politicians," said Jeremy Stretch, head of currency strategy at CIBC.

The agreement would mean the government has less money to provide employment opportunities for the 9.2 percent of Americans looking for jobs, the Post reported.

Cuts to the defense budget may boost unemployment by leading to layoffs of government contractors, which has been a major concern since the details of the deal were announced.

There are concerns that states will receive less federal aid, a move that is predicted to be a major blow to economic recovery and growth.

Josh Feinman, chief global economist at Deutsche Bank Advisors, told the Post that the deal amounts to “removing spending power from the economy at a time when it needs it. That’s likely to make the economy weaker."

Critics also fear that it is likely that even the highly publicized credit rating downgrade hasn't been completely avoided.

The Post notes that the $1.5 trillion in spending cuts is far short of the $4 trillion that Standard & Poor's asked for to protect to the AAA rating.

Furthermore, those cuts that lawmakers have committed to remain undefined. As CNBC puts it, “there has been no decision yet on where the axe will fall.”

“We still take the view that the AAA credit rating of the U.S. is unsustainable in the medium to long term, and the question therefore becomes not if the U.S. will be downgraded, but when," Barings’ Nigel Sillis, the Director of Research, Fixed Income & Currency team, reportedly wrote in a note viewed by CNBC.

The shortcomings of the deal are far too threatening for some critics to even consider joining in any celebration, especially as the nation moves closer toward the 2012 presidential elections.

"At some point we are going to have to take some bitter medicine and, the longer we wait, the harder it will be," Dodge Dorland, chairman and chief investment officer at Landor & Fuest Capital Managers, told CNBC.

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