On a weekend of high drama, President Barack Obama finally managed to get congressional leaders on both sides of the political divide to agree on a compromise plan to raise the debt ceiling and avoid a potentially devastating default.
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The plan, which will cut $2.4 trillion from the deficit over the next decade, still needs to be passed by lawmakers, with uncertainty lingering over whether progressive liberals or Tea Party Republicans will vote against the plan.
Following a press conference by the president in which he said the deal is not his preferred choice, critics were quick to condemn the deal and the president’s role in getting it.
“It will damage an already depressed economy; it will probably make America's long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status,” wrote Nobel Winning Economist Paul Krugman in the New York Times.
Claiming that cutting spending when the economy is so weak is a major mistake, Krugman believes the current plan will make things worse for the economy and embolden the Tea Party movement, whose members' successful use of brinkmanship as a political tool will leave them with no incentive to be more politically reasonable in the future.
Mitch McConnell, the Republican Senate Minority Leader, believes there will be bipartisan agreement on the debt deal but thinks opposition will remain on both sides of the house.
“I'm sure there will be both Democrats and Republicans who, in the end, find the agreement wanting in one way or another,” said McConnell.
“The Republicans have got a win having avoided any tax hikes in the deal,” said Michael Yoshikami, founder & CEO of YCMNET Advisors, in an interview with CNBC following news of the deal.
But Yoshikami added that the victory doesn't guarantee support from the GOP side of the aisle.
“I expect Democrats to pass the deal, but it remains to be seen if Republicans will back the deal,” said Yoshikami.
The U.S. economy is slowing significantly, with data last week showing growth in the second quarter was just 1.3 percent. With unemployment at 9.2 percent, the outlook for the economy and the president’s re-election hopes remains very uncertain.
“We see a big chance of another round of quantitative easing by the Fed,” said Yoshikami, who predicted the further injection of capital into the economy will not be called "QE3" in a bid to avoid political opposition.
“The immediate effect of spending cuts will be to make the pace of economic growth slower than it otherwise would have been,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics, in a research note late on Sunday night.
With stocks gaining in Asian trade ahead of the vote in the House later on Monday and expected to gain in both Europe and the U.S., Shepherdson is predicting further gains for stocks and the greenback if the deal passes.
“If the House rebels against the Senate deal, the markets will presumably take their revenge, with stocks and the dollar hit hardest, but it is difficult to imagine no adverse effect on Treasurys, too,” he said.
“The real problem as we have seen in Greece and the U.S. is growth” said Nick Carn, the founder of Carn Macro Advisors, in an interview with CNBC.
“I think we are entering a different situation which is a deficit reduction environment—we are faced with no easy answers,” said Carn, who added that major economies around the world are just at the beginning of a long, painful round of spending cuts that will threaten global growth rates.
