Santa Claus Isn’t Here Yet

11/14/2011 10:00 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

Time is running out for Congress to reach an acceptable debt-reduction plan, or we could all have a blue Christmas this year, writes MoneyShow.com personal finance expert Terry Savage.

Before you start thinking of Thanksgiving turkey or holiday shopping, there’s one big hurdle to surmount. It’s the November 23 deadline for the Congressional supercommittee to come up with at least $1.2 trillion in cuts to the Federal budget deficit over the next ten years.

If they don’t work out a deal, automatic budget cuts will take effect based in last summer’s debt-ceiling agreement. While we’ve all been busy watching Greece and Italy, this small group of legislators has been quietly working on a deal.

It’s an unusual situation in Washington—no leaks, no reports, not one word to let the media know what’s going on. And that’s what gives me so much hope.

Several past negotiating teams, notably the “Gang of Six,” have been able to come close to agreement. But then the news leaks and the frenzy begins. No one wants their side to give in.

But if there isn’t some give and take now, the consequences could be draconian cuts in everything from the military budget to all kinds of social programs. Not to mention that the stock market could once again sink dramatically if lack of agreement leads to a cut in America’s bond rating.

Of course, there are other possibilities. They committee could ask for a short extension of the deadline. The goal is to have the Congressional Budget Office “score” the savings in time for Congress to pass the package. But with computers, you’d think that process shouldn’t take four weeks.

Or the committee could simply deadlock—leaving it back in the hands of Congress as it rushes home for the holidays. This would be one sack of coal to leave in citizens’ stockings! Failure to agree, and then failure to pass cuts, could lead us to the brink of Italy and Greece.

And then there’s the brighter possibility. Maybe they’ll come to agree on even deeper cuts than the minimum. That could set America on the right course for the next generation.

It wouldn’t be appreciated by the voters now. But maybe we can all get past the short-term and think about the future as it will impact our children and grandchildren.

While I ordinarily counsel against reacting to news events, the results that come out of the supercommittee will create a significant turning point for the American economy. So you might want to be prepared to adjust your long-term investment allocations. Just don’t jump before thinking out the consequences:

  • Gold. If the supercommittee and Congress can’t come to an effective resolution, gold will surely soar to new highs. The market will be thinking that inevitably the Fed will be forced to print money to pay off our debts.
  • Interest rates. The fear of money printing—inflation—(or debt default) will eventually push interest rates much higher. Just look at what happened in Italy.
  • The stock market. The immediate reaction would be downward, as market participants fear uncertainly. But don’t get caught off-guard. Stocks have historically been a good hedge against inflation, so think twice before selling stocks in a panic.

Do we want to live the turmoil that is happening in Europe today? Do we want to force our children and grandchildren to work to pay our retirement benefits, instead of saving for their own retirement? Do we want to lose our place as the global leader in defense of peace?

That’s what’s on the line with these 12 members of Congress. Let’s hope they can make a deal—before we see our future dwindle away. And that’s The Savage Truth!

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