Obama buys time for global markets, but for how long?

Crisis averted till Feb 7, 2014 for the new debt ceiling deadline

Like a third rate thriller, the US government managed to save the country and the world in the last few moments of what could have been the next round of financial tsunami. Rather than feeling good about the outcome, the event leaves behind a sickening feeling.
 

By signing the spending measure, President Obama allowed federal workers, who have been sitting at home for the last 16 days to join work from Thursday. What the president has however done is pushing the can forward by a few months and ensured that he and his government get to spend the New Year in relative peace.

 

All that he has managed to do is buy time by increasing his budget spend till January 15 and raising the debt ceiling deadline until February 7, 2014.These measures would ensure that tapering will not start by December 2013 as was earlier envisaged- reason enough for markets to move up. This will add another $255 billion to its $16.7 trillion debt. The 16 day shutdown has already resulted in 0.6% of GDP being shaved off in the December quarter according to S&P, that is nearly 30% of the expected GDP growth of 2% for the quarter.

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Obama and the US congress have pushed their country and in turn the world economy closer to the cliff rather than rescuing it. Such short term measures only add to the problem. A long term fix to the economic woes has been missing since the start of the Lehman crisis. Repeated quantitative easing only added on to its debt pile, and increasing the debt ceiling only means the economy will have a higher wall to jump from, thus hurting it more than earlier.

 

What is saving the US from its huge pile of debt is the near zero interest rate, which also helps in the country having a manageable fiscal deficit. However, as and when tapering starts, interest rates are bound to go up. It is only then that the country will realise the cost of its quantitative easing. Higher interest rates would mean money moving out of equity markets into bonds and would also result in a currency crisis globally as dollars are sucked out of various markets. The chain of events would mean that the country would be perilously close to a default.

 

As for Indian markets, while we have some relief from global events till January 2014, state election results will be the next thing to watch. If the UPA shows signs of strength in these elections, we will not have to wait for the US debt crisis to tell us which way the market will go.