The seemingly never-ending budget impasse in Washington is a classic case of political risk, often manifested in market blowback created by government mismanagement of the economy, BloombergBlack Investment Strategist Christopher Krug writes.
While nobody in Congress disputes that the federal government is running up too much debt, any consensus on how to fix the problem appears beyond reach. Agreement over how sequestration might affect the economy seems just as elusive.
A quick explainer: The cuts that began Friday affect only programs that have their budget set every year. Defense spending, for instance, and highway construction. They have no effect on long-term entitlement programs like Medicare and Social Security, programs that are huge (in 2011, they accounted for 44 percent of federal expenditures, according to Bloomberg News). That figure has increased 10 percent over the past 20 years and is likely to keep rising as more baby boomers retire. It’s an unsustainable trend, and prominent money managers like Stan Druckenmiller warn that these growing costs are the real threat to the future of the U.S. economy. And current debate over sequestration will prove trivial compared to the inevitable fight over Social Security and Medicare, Druckenmiller and others argue.
In any case, the economic impacts of sequestration may be overstated. John Taylor, an economist at Stanford University is among those who say the impact will be minimal and the economic hit is worth the ultimately positive effects of belt-tightening. Others, like Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington, say Congress is playing with fire.
The market effect of the most recent budget cuts is ultimately uncertain but what is certain is that political risk is here to stay, Krug concludes.
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