Posted by WARREN MOSLER on July 14th, 2011
Here’s my take:
A. They get a few trillion in long term cuts and maybe a few that kick in reasonably soon and extend the debt ceiling
This would help ensure aggregate demand stays low for long, which is bond friendly, and stocks muddle through in a range with slowing earnings growth but just enough top line growth to stay positive.
B. They don’t extend the debt ceiling
This would immediately and directly reduce aggregate demand, which is very bond friendly and very bad for stocks, as many top lines go negative until federal spending is restored.
And either way the economy remains vulnerable to looming external shocks, including a China slowdown, euro zone default and/or slowdown, UK slowdown, and a strong dollar.