Short-term solutions for a life-long problem

Just like a big playoff game, a forced shot in the last seconds has made it possible for the US Government to reach an agreement on raising the debt ceiling, see Reuters coverage. It has been, as basketball fans would call it, a buzzer beater.

However in this case, there is no real reason to high-five your teammates or to have even the smallest grin on your face. Because this is not a win, this has only been a disaster-avoiding move. Maybe the markets will see it differently during the first hours and recover some of the ground lost last week (gold is already down a little), but the situation is still critical, and the rating agencies' threat to slash USA's AAA rating is still there.

The last minute deal that has helped avoid the possibility of the US defaulting on its debt includes a 2.4$ trillion spending cuts package to be applied for the next ten years (no extra details are known yet about how and where they will be placed). However these cuts will not be introduced until at least 2013. The reason behind that? Sadly a partisan one, as 2012 is election year and neither Democrats nor Republicans want their chances of winning the presidential race altered because of something as ugly for voters as these spending cuts. Of course spending cuts are never popular or welcomed decisions, it is far easier to "buy" a vote by promising new social measures or tax reductions than by being responsible with your country's finances... but these cuts are sure needed and someone has to do them. Once again short-sighted and selfish political interests take the upper hand and put everyday's problems and the future of the economy to the background.

I must say something to justify Democrats and Republicans decision to delay the cuts until 2013 though, the US economic recovery is being quite weak and slow as of today, so applying extra spending cuts now could definitely stall said recovery. And the last thing the US needs now is an economic contraction, as it would be devastating, specially regarding unemployment. But once we have reached this point we can say that this is (once again) delaying the problem, not solving it. 

We are in a situation where people should already notice that a great part of the economic growth of the pre-2008 years was debt-based rather than real growth. Financial irresponsibility has been the most common behavior regarding government spending and debt issuing, not only in the US but elsewhere. Now the time to pay the bills has come, but nobody seems to be up for the challenge.

A skyrocketing euro for a deep diving Europe

Although it is not the first time I write about why I think the actual exchange rate of the euro against other currencies is wrong (see here and here), the latest developments on the Eurozone's life well deserve a revision of the subject. A quick look at the Eurozone lets one see some not very encouraging facts. The Greek tragedy has been quieted down in the last days but is far from over. In fact almost everybody with eyes in the matter is expecting a default sooner rather than later. The only uncertainty seems to rest in knowing if it would be an orderly default, basically a giant debt restructuring effort (hopefully...), or a messy one.

On the opposite side of Europe we have Portugal, but it seems to be in the opposite side only geographically speaking, because its bonds have also been kicked out of investment grade and are now officially  'junk' grade like Greece's. This will make Portugal financing efforts (even) more difficult, which in turn could end with Portugal asking Europe for more money soon. And to complete the domino effect, this troubles are putting extra pressure into Italy's and Spain's not-exactly-buoyant finances.

Credit: Yahoo! Finance

But the euro simply does not care. As seen in the graph above, the euro is rising against the US Dollar, the British Pound and the Chinese Renminbi, and it is doing so with a specially notable rally in the actual week despite all the bad news surrounding the Eurozone. The european currency is spiking also against special cases like the Japanese Yen and the Swiss Franc, although this is a totally different matter. The Yen has its own set of playing rules because of the Fukushima incident, and the Swiss Franc had been overtly growing uncomfortable with its strength against the euro affecting their exports competitiveness. The case with China's Renminbi is a difficult one to analyze, but what happens with the Dollar and the Sterling Pound?