US Market Trouble After Deal Done

The deal reached by the US Congress to raise the $14.3 trillion debt ceiling has spared the nation an immediate catastrophe while potentially setting a path for longer-term disasters.

Financial markets' initial euphoria over the deal faded quickly. The S&P 500 index of US stocks declined for the sixth day in a row, losing 0.4% Monday to close at 1,286.94. The dollar gained against the euro and the yen but declined to a record low against the Swiss franc.

The markets' response underscores an unfortunate reality: While the US government may have averted a self-inflicted disaster, it hasn't solved fundamental problems and appears to have created new ones. What the US needs is a deficit-reduction plan to address its long-term fiscal gap without weighing too heavily on a weak recovery.

Instead, it's getting the opposite: immediate spending cuts that threaten the recovery in the short term but aren't substantial enough to fix the long-term budget problems. Under the deal the House approved Monday, the government must find $21 billion in new spending cuts next year, and possibly much more.

If legislators fail to agree by the end of this year on at least $1.2 trillion in further deficit reduction, the country will face indiscriminate cuts in domestic and defence programmes. The cuts could hamper the recovery, especially given $250 billion in expiring unemployment benefits, the end of the temporary payroll-tax cut and the winding down of the stimulus programme.

Growth was barely evident in the first half, and a manufacturing report on Monday showed a steep deterioration in both activity and hiring plans in July. A growing economy is crucial to fixing the government's finances. Economic output is the denominator in the US government's debt burden, which currently stands at almost 100% of GDP, according to the International Monetary Fund -- the highest level since the aftermath of World War II.

Even if the economy doesn't falter under the cuts, the deal provides far too little future deficit reduction to put the government's finances on a sustainable path, and possibly too little to maintain its AAA credit rating.

Economists estimate the US structural budget deficit - the gap that must be closed to achieve long-term stability - at about 5-6% of GDP. The $2.4 trillion in deficit reduction envisioned in the compromise plan amounts to 1% of projected GDP over the next decade.

Make no mistake: The US is a wealthy country that can afford to solve its budget problems. Closing the fiscal gap will require political leaders to embrace more ambitious policies and to build popular support for the sacrifices they will entail. These tasks will only be more painful if markets ultimately force them on us.

Us market crash very sharply, there is no support to market from deal investor lost their faith on US economy because of that market down like :
Nasdaq 2,669.24 -75.37 -2.75%
S&P500 1,254.05 -32.89 -2.56%
Dow Jones Ind. Avg. 11,866.62 -265.87 -2.19%