As the deadline to lift America’s debt ceiling approaches, a group of six US senators have stepped forward with a last-ditch plan to tackle the country’s budget crisis. The behavior of financial and capital markets over the past few weeks have been roiled by massive shifts into safe-haven assets as investors fled risk. Recent market behavior, however, indicates a shift back to normalcy.
The bipartisan “Gang of Six” plan is to reduce the budget deficit by $4 trillion over the next ten years, including a tax increase that would raise $1 trillion in new revenues over the same period by closing several loopholes in the American tax system. The passage of such a deal depends largely on whether the GOP will accept the tax hikes included.
It has long been assumed that Congress would not allow the US government to default on its loan payments, but as the deadline inched near both parties became piqued at the other’s unwillingness to compromise. The resultant deadlock has riddled global markets with added uncertainty.
This week, however, what we see is the price of oil moving higher while gold and silver enter a price decline; the US dollar is paring gains as investors opt for the euro; and Asian, American and European stocks are edging higher. These are all signs that investors are expanding their economic outlook and adjusting their portfolios to take on more risk following the economic data surrounding the US housing market, high earnings reports from several large companies, as well as optimism that the “Gang of Six” proposal stands the best chance yet of being accepted and passed.
This in no way guarantees that the “Gang of Six” proposal will pass, only that investors view it as a solid starting point for resolving the budget crisis. A recent Republican plan to amend the US Constitution in a way that would have required the government to have a balanced budget failed to pass by the needed majority, and it will be interesting to see how the backlash from that failed initiative plays into the negotiations over this latest proposal.