The deal

It looks like the United States has managed, just barely, to not shoot itself in the head. Rather, it shot itself in the foot. In either case, the wound was self-inflicted and therefore completely unnecessary. The real question is how bad is the damage.

The deal on the debt ceiling raises the debt ceiling somewhat and imposes some spending cuts immediately, allows the President to raise the ceiling further in 2012 (enough to get into early 2013) subject to a Congressional 2/3 override, and creates a Congressional committee to recommend further cuts with automatic cuts triggered if the recommendations are not accepted.

This does nothing to help the underlying economic weakness of the US economy — and probably will make matters worse in the short run. And it increases the old GOP bugaboo — uncertainty. At best it buys time to rationally consider how to lower the deficit — political breathing room. At worst, it puts off dealing with the issue until next year – in the middle of an election (hardly the time for rational discourse). And it almost guarantees that we will go through another round of political maneuvering in 2013 — as it has made the debt ceiling vote into a mechanism for short term political leverage.

The extent of the damage to the US reputation is likely to emerge over the next few months. Watch what happens to the Treasury market over the longer term. Do investors slowly dump Treasury’s? Does an alternative safe haven investment (and currency) emerge? Remember that economic decay is often a slow moving event — witness the 1920′s and the international economic role of Great Britain.

If the breathing room ends up with a relatively acceptable solution at the end, this will be a turning point. If not, the real title of the bill will be the Give Investors Time To Adjust Away From US Investments Act of 2011.

Read more at The Intangible economy