MBA FaceOff Blog

Dysfunctional Government, Economic Growth and Markets

Jenner Smith

The congressional super committee charged with finding an agreement on deficit reduction has a little more than a week to go until its November 23rd deadline. As that date approaches investors should be aware of the potential consequences should the panel be unable to reach consensus. If there is no agreement in place a series of budget cuts totaling roughly $1.2 Trillion would automatically take place starting in 2013, the cuts would be split between defense and non-defense spending. The consequences of these cuts coming at a time when the economy is barely growing at a positive rate, the macro environment continues to be highly uncertain and unemployment remains stubbornly high could be extremely deleterious and could put the US inexorably on the path to recession.

While I think most Americans can agree on the need to address serious fiscal challenges, a series of cuts that fail to address long term fiscal issues and that take place as the economy is attempting to get up off the mat would be unwise. As investors we are attempting to gauge the market reaction to the potential outcomes and believe that the lack of an agreement would cause markets to pull back significantly, reminiscent of the debt ceiling debate this summer, or the initial failed attempt at passing TARP legislation in the fall of 2008.

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