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1 Mar 2013
It's official, the US sequestration kicks in
The sequestration, for those unfamiliar with the term, is defined by the US Federal Budget as "the practice of using mandatory spending cuts in the federal budget if the cost of running the government exceeds either an arbitrary amount or the the gross revenue it brings during the fiscal year."
These automatic federal budget cuts are officially kicking in within as we write these lines, after a final bill presented by Democrats and Republicans in the Senate failed to win enough support.
What this means is that the US will now go through an across-the-board spending cuts in the face of annual budget deficits, which are thought to amount over $85 billion in the current fiscal year.
"Assuming that every dollar cut in spending reduces GDP by a dollar, the sequester will shave US growth by around 0.5% this year" comments Marc Chandler, Global Head of Currency Strategy at BBH.
Marc adds: "The sequester itself is a bit of a farce in the sense that it was never intended to be enacted. It was purposely designed to be absurd to give the political class incentive to find an alternative."
The analyst suspects that what is behind the 'sequester' is the fact that main political players did their calculations concluding is the best worst alternative.
Obama crossed the wires later Thursday, saying that "tomorrow I will bring together leaders from both parties to discuss a path forward; as a nation, we can’t keep lurching from one manufactured crisis to another. Middle-class families can’t keep paying the price for dysfunction in Washington.”
Kathy Lien, co-founder at BK Asset Management, notes: "We've been down this road before with the debt ceiling and survived."
But as Kathy adds, here comes the kicker: "The Obama Administration has another 30 days to come up with a deal to cancel and avoid the cuts. The more important deadline is March 27th, when the government runs out of money and will be forced to shutdown if no additional measures are taken." Investors are holding out hope for a last minute deal, Kathy says.
These automatic federal budget cuts are officially kicking in within as we write these lines, after a final bill presented by Democrats and Republicans in the Senate failed to win enough support.
What this means is that the US will now go through an across-the-board spending cuts in the face of annual budget deficits, which are thought to amount over $85 billion in the current fiscal year.
"Assuming that every dollar cut in spending reduces GDP by a dollar, the sequester will shave US growth by around 0.5% this year" comments Marc Chandler, Global Head of Currency Strategy at BBH.
Marc adds: "The sequester itself is a bit of a farce in the sense that it was never intended to be enacted. It was purposely designed to be absurd to give the political class incentive to find an alternative."
The analyst suspects that what is behind the 'sequester' is the fact that main political players did their calculations concluding is the best worst alternative.
Obama crossed the wires later Thursday, saying that "tomorrow I will bring together leaders from both parties to discuss a path forward; as a nation, we can’t keep lurching from one manufactured crisis to another. Middle-class families can’t keep paying the price for dysfunction in Washington.”
Kathy Lien, co-founder at BK Asset Management, notes: "We've been down this road before with the debt ceiling and survived."
But as Kathy adds, here comes the kicker: "The Obama Administration has another 30 days to come up with a deal to cancel and avoid the cuts. The more important deadline is March 27th, when the government runs out of money and will be forced to shutdown if no additional measures are taken." Investors are holding out hope for a last minute deal, Kathy says.