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The Supercommittee Will Fail — And When It Does, Markets Will Crash

The so-called Congressional supercommittee — a group of 12 politicians with the unenviable task of reaching a compromise on federal spending and our massive budget deficit — is running out of time.

And so are American consumers and investors hoping for a deal to bolster a struggling economy and prove the stock market rally is here to stay.

Only about a week is left for the group of six Republicans and six Democrats to craft a plan that will slash $1.2 trillion from the U.S. deficit during the next decade. If the debt committee can’t reach a compromise, deep and automatic cuts to Medicare and defense spending will trigger — which either individually or in tandem could be very damaging to an already ailing American economy.

For investors, the firing of these triggers certainly would spook Wall Street. Just look at the 500-point drop in the Dow after the U.S. credit downgrade for an example of how market-moving these kind of big-picture setbacks in Washington can be.

And as the Nov. 23 statutory deadline for the supercommittee approaches, Europe’s deepening debt problems only add to the pressure as investors are focused on politics even more than they are company balance sheets.

There is hope among the Capital Beltway crowd that the pressure-cooker of tense negotiations and high stakes will ultimately force both sides to realize the importance of a deal — even if it is a last-minute one. But the divisive nature of American politics makes most folks very skeptical.

And even if this group of 12 can reach a tenuous deal, there still is the very high hurdle of an up-or-down vote in Congress. The fallout of Election Day 2011 and a heated GOP presidential primary continues to show politicians are heavy on partisanship and light on compromise. That means even if the debt committee goes out on a limb with a pact that is unpopular to many Democrats and Republicans, the party base of either side could easily break that limb by trying to twist the debate more to the left or right to suit their respective bases.

To top it all off, any political agreement from Congress is just that — a political agreement. As a very insightful piece in The New York Times stated on Sunday, it’s not enough for voters and politicians to think they know what’s best. Those dealing in government debts hold a significant amount of power and will show how practical a solution truly is. As Alan Cowell wrote in the Times, “In Greece and Italy, as in Ireland and Portugal before them, unelected bond traders defined the destiny of elected leaders. By week’s end, the market jitters had spread to Spain and France.”

So in a nutshell, the supercommittee has to effectively solve the complicated problem of U.S. debt while catering to intransigent members of their political parties, overly emotional voters and risk-averse global financiers.

Is this all overly pessimistic? Maybe. But consider this: Congress itself thinks there is no way for the debt committee to succeed — and rather than deal with hard decisions or the harsh repercussions of inaction, Sens. John McCain and Lindsey Graham plan to introduce legislation to undo the Budget Control Act and let everyone off the hook.

Ideally this wouldn’t have to happen … but practically, it’s not a bad idea. After all, what’s worse: The automatic spending cuts, or validation that our do-nothing Congress has an utter lack of leadership?

America already has resigned itself to the latter.

Jeff Reeves is the editor of Write him at, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

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