Back in the USA

Similar dynamics are playing out here at home as Democrats and Republicans knock skulls over taxes, spending and the deficit. Their constituents scream for jobs, while groups like Occupy Wall Street, Grover Norquist's Americans for Tax Reform and the Tea Party press hard for competing demands.

The unwillingness to make politically risky choices is why, back in August, when the deal to raise the debt ceiling fell short of what was needed to stabilize the fiscal outlook, Standard & Poor's cut America's AAA credit rating. The market hasn't recovered from that downgrade.

Congress committed to budget savings of less than $1 trillion over 10 years, with an additional $1.2 trillion hopefully coming from the select supercommittee. S&P was looking for something closer to $4 trillion in savings to keep the U.S. rated AAA. The analysts added that the government was losing its ability to manage public finances, due to "America's governance and policymaking becoming less stable, less effective and less predictable." This interparty bickering, which took the country to the verge of a government shutdown and default on its debt, "weakens the government's ability to manage public finances," they suggested.

America faces stark choices, tight deadlines and scary consequences for inaction, too. Yet politicians continue to dance around the inevitable, unable to compromise and unwilling to do the honorable thing: sacrifice their political careers to do what's right for the country.

The US debt picture

Even assuming the supercommittee gets a deal proposed in time for Thanksgiving and it gets passed by Congress for Christmas, America's debt will continue to grow. Analysts at S&P expect that, assuming the Bush tax cuts are extended for the majority of Americans (a stimulus measure that enjoys a modicum of bipartisan support), net government debt would rise from 74% of GDP this year to 85% by 2021. So more spending cuts and higher taxes will still be needed.

But if Congress fails to act, the $1.2 trillion in automatic cuts kick in (hitting defense spending hard), the economy will weaken in the face of Europe's tailspin, S&P would likely cut the U.S. credit rating again (to AA from AA+) as the net debt load swells to 101% of GDP by 2021 and the government reinforces the notion that the country is ungovernable.

That, no doubt, would result in a harrowing repeat of the early August market collapse. A drop in financial wealth, and lost confidence, would push the fragile U.S. economy down into recession with the eurozone. China and the other emerging-market economies couldn't maintain their growth with the world's two largest economies in the ditch.

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With a week to go to the Nov. 23 deadline, things aren't looking good.

Republicans have proposed a $1.2 trillion deal (the bare minimum) made up of $750 billion in spending cuts and $300 billion in new taxes, which come from lowering overall rates but capping deductions and tax credits.

Democrats have rejected this, arguing it would increase the burden on middle-class families. They've put forward a $2 trillion deal with equal shares of cuts and taxes. Republicans claim Democrats are resisting cuts to Medicare -- a shame, because medical spending is the main driver of the long-term budget mess.

News reports are filled with rumors that members of Congress are laying the groundwork for failure as the two parties remain far apart on taxes, Medicare and Social Security. There are efforts to save the Pentagon from the deep automatic cuts that would kick in if no deal is reached. There is also chatter that tough decisions on taxes, including the Bush tax cuts, could be pushed back until after the 2012 presidential election.

In other words, they're trying to kick the can down the road again.