Debt Deal Unleashes the Bulls; Futures up 182

By on August 1, 2011

The Dow futures are up 182 as of this writing as the impending crisis of a possible, but improbable, debt default appears to have been averted.   A debt ceiling increase agreement has been reached, although it needs to be voted on by the House and Senate.  Early indications are that it will pass this hurdle.

The debt ceiling will be increased by at least $2.1 trillion; good through 2012.   The plan is to cut the deficit in two phases by a total of $2.4 trillion and raise the debt ceiling by $2 trillion in three stages.  There could be additional spending cuts later.

Both the Republicans and Democrats  compromised as there will be some agreed spending cuts ($1 trillion over 10 years), although not as far as House speaker Boehner had been pushing for.

Mechanics of the deal:
  • Immediately enacted 10-year discretionary spending caps generating nearly $1 trillion in deficit reduction; balanced between defense and non-defense spending.
  • President authorized to increase the debt limit by at least $2.1 trillion, eliminating the need for further increases until 2013.
  • Bipartisan committee process tasked with identifying an additional $1.5 trillion in deficit reduction, including from entitlement and tax reform. Committee is required to report legislation by November 23, 2011, which receives fast-track protections. Congress is required to vote on Committee recommendations by December 23, 2011.
  • Enforcement mechanism established to force all parties – Republican and Democrat – to agree to balanced deficit reduction. If Committee fails, enforcement mechanism will trigger spending reductions beginning in 2013 – split 50/50 between domestic and defense spending. Enforcement protects Social Security, Medicare beneficiaries, and low-income programs from any cuts.


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