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5 Ugly Truths About Life After the Debt Deal

Forget the coddling -- we're still in trouble


QE3, here we come

Fundamentally, America needs Congress to suck it up and take decisive action on the hard issues. Instead we get intransigence and infighting. So it’s ironic that many think America needs the Fed to just get out of the way — even as the central bank insists on doing more. While many folks doubt the efficacy or fiscal responsibility of “quantitative easing” to spur lending and stimulate the economy, it seems likely the Fed is going to embark on yet a third go-around of this unconventional and sometimes unpopular monetary policy.

Chairman Ben Bernanke has tried to act coy about QE3, saying he would only get involved if the fragile recovery seems like it may fall apart altogether. Well, an ugly alphabet soup of reports hit the market this week — from the ISM slump to disappointing GDP numbers to what assuredly will be a poor ADP payroll report Friday — should convince Ben things are dire. Perhaps the only reason not to embark on QE3 is the threat of inflationary pressure, but oddly enough Bernanke still claims inflation is moderate. So don’t bank on that deterring the Federal Reserve.

U.S. credit rating should be downgraded

The idea of a simple either/or equation for the debt ceiling debate — that we either raise the borrowing limit and everything is OK or we default and face a disastrous credit downgrade — has long been an oversimplification. The persistence of partisan bickering, brinksmanship and flat-out misinformation on both sides of the aisle is proof that the crisis in federal spending confidence surrounding is far from over.

My colleague Dan Weiner, one of the top Vanguard mutual fund analysts on Wall Street, recently wrote rather buntly, “Frankly, if the ratings agencies don’t downgrade U.S. debt, it will be just another shocking example of their inability to really understand what’s happening in the world.” I couldn’t agree more. What our politicians need to realize is that the rest of the world is taking this debt crisis seriously, and it’s about time they did, too. If we have to suffer a credit downgrade to achieve that, so be it.

We are no better than the eurozone or Japan

The ugliest truth of all is that America is no longer the economic superpower it once was. Many folks have clung to rather naïve notions that 2011 was going to be better than 2010. Stocks were supposed to find another leg up, housing might rebound, unemployment could steadily decline, GDP growth would continue to heat up. In short, we expected that America would do what it does best — pull itself up by its bootstraps and prove to the world who’s boss.

Well, it’s time to realize that the world has changed. The debt debate in the U.S. is not unlike the austerity fights in Europe — only instead of Greece fighting Germany, it’s Democrats fighting Republicans. And just like Japan watched its economy struggle as red-hot growth propelled China past it in a big red blur, America is watching emerging markets continue to thrive as its growth flatlines.

It’s a harsh reality, but the sooner we accept this, the better. It’s the only way to think rationally about what’s best for our economy and our federal budget in the long term.

Jeff Reeves is the editor of Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

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