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It seems like a deal is about to be cut on raising the Debt Ceiling. The Republicans have been fighting for 4T USD in cuts with no tax increases, and the Democrats have been proposing 2T USD in cuts with a tax increases to increase Federal revenues. The spending of the Federal government is at an above historic norm of 24% while tax revenues are lower than normal at roughly 11% due to a Recession and moribund growth that the US is experiencing. The deal that is likely to be cut is going to be a 2T USD plus cut in spending and a tax increase.

The ramifications of this deal on the US financial markets will be that it is viewed as a positive step in the right direction. The Markets are likely to go higher on the announcement of a struck deal as it is one more worry off the table, and that the a further debate will occur after the 2012 elections.. However this is going to be a relatively short lived affect as the central issue of the US being a nation that can act responsibly will have been eroded. The hope that the US House of Representatives being in Republican control could act with a firm principled resolve to rectify a universally acknowledged unsustainable deficit will have been dashed. The air will go out of the room and the world will conclude it is just more of the same business as usual. The second affect of raising taxes is that it will have a slightly increased drag on an already sluggish economy. So what one can expect in the medium term is that an already sluggish economy will continue to be even more so. Thus what we are seeing economically is that a new normal is emerging.

While the debate of whether the US becomes all of one thing (Conservative) or all of another (Liberal) will largely be decided in the 2012 election. The terminal* moment for the US with regards to its debt may well be the Republican acquiescence to raising taxes as part of raising the debt ceiling. The reason why this is so is that the world will view it that political expediency took precedence over the principle that the well being of the nation comes first. The world will in affect cease to believe in its heart that the US has the will or capability of making the hard choices that are necessary to save itself from a debt crisis. One can not underestimate the air that will have been sucked out of the room by such a compromise.

* The rational for stopping short of saying that a tax increase compromise as part of the lifting of the debt ceiling is a Terminal moment is that after the 2012 election there will be one more chance albeit harder to accomplish than making the hard choice of holding firm now. The act of acquiescing is a slippery slope that will be difficult to re climb once one has already given in on their principles.

If one were to make a guess the period after the 2012 election will be a period of high risk for a debt crisis if Obama is reelected. BO reelection will signify that there will be either no modification of US spending or at the very least there will be another 4 years of gridlock . The second window for failure comes in 2014 when most of the provisions of the HC Bill take affect. If the HC Bill is not repealed the provisions will have a detrimental affect on an already laboring economy. It is as those provisions of HC take affect that a precipitous slide in the economy will begin,