What can the deficit supercommittee hope to accomplish?

The WaPo had a good update on the issue but I wanted to clarify one point that I think has been muddied in much analysis.

The deficit-reduction supercommittee could always pull a rabbit out of a hat, I guess, but the likelihood of anything but gridlock has been low from the beginning.  I give the R’s some credit for breaking the no-tax-increase-ever pledge, but their offer is so fundamentally unbalanced–$300 billion in revenue increases from closing expenditures in exchange for rate cuts that will amount to almost $4 trillion in tax cuts—that it can’t taken seriously.

But my point here is about something else.  There’s a meme developing that if the committee were to gridlock, markets would react badly, interest rates would rise, and the message that “US=Greece” would be clear to all.  To which I say: nonsense.

In fact, I’d encourage you to generally respond to the statement: “if X happens, markets will react badly” with a healthy dose of skepticism.  Half the time, this formulation is scaremongering, used to garner support for your side.  And the other half, even experienced analysis don’t know how the market will react (remember the S&P downgrade–interest rates on US Treasuries fell after the announcement…go figure).

Most recently, the landscape is littered with Chicken Little warnings about the impact of current US levels of indebtedness on interest rates.   At the end of the day, these alarmists do a lot more harm than good, because someday Chicken Little will be right, and no one will listen to him.

In this case, market players have of course priced in the possibility of the Supercommittee failing to agree on a plan.  I’m not saying these players are all-knowing or even particularly rational, but if they haven’t figured out that gridlock is the likely outcome, they’ve got no business betting on markets.

And, of course, the trigger mechanism is there to ensure $1.2 trillion in savings over ten years.  But here’s the thing—and my readers know I’m as far from Chicken Little as you can get.  I take this warning more seriously than the “gridlock=doom” meme:

“…analysts are deeply concerned that lawmakers could “de-trigger” the automatic cuts, undoing even the modest steps Congress has so far taken to tame the soaring debt.”

If the Supercommittee fails and Congress takes apart the trigger, that could send a worrisome message to markets that our politics are even more dysfunctional than people thought.  I’m not saying that I’m sure markets will react badly—my knee continues to jerk with skepticism re the “it will tank the markets!” fear-mongering.

I’ve also been outspoken about the undemocratic nature of the whole process and the ineptitude of the Congress to do their job as a full legislative body and craft a balanced, sustainable budget.

But if they gridlock and de-trigger, I’ll be nervously watching the interest rates on T-bills.