U.S. debt limit vote in Congress set for Wednesday

debtOn Tuesday the Dow and S&P 500 extended their recent multi-year gains amid growing optimism over decent corporate earnings, a sustained U.S. housing recovery, and growing expectations for a short-term resolution to the U.S. debt ceiling showdown.

Although Tuesday’s real estate report showed that U.S. existing homes unexpectedly fell in December while supply shrank, investors took comfort after hearing that a total of 4.65 million homes were sold in 2012, a jump of 9.2 percent from 4.26 million homes in 2011, and the largest increase since 2007.

In 2012 the median price of an existing home rose to $176,600, representing a 6.3 percent gain from 2011.

U.S. Debt Ceiling

On Wednesday the Republican-controlled U.S. House of Representatives is expected to vote in favor of delaying the United States’ borrowing limit.

Following a House Republican retreat last week, Republicans have signaled a growing sense of optimism that they have the necessary votes to pass the measure.

The United States is currently on a collision course to hit the ceiling again sometime between mid-February and early March under the congress-imposed debt ceiling borrowing limit of $16.4 trillion.

If the House passes the legislation it will delay the government’s $16.4 trillion debt limit until May 19th.

Many investors have been concerned that House Republicans will resort to the same tactics they engaged in the summer of 2011 when they refused to raise the debt ceiling and threatened a U.S. sovereign default unless certain budgetary conditions were followed; namely, that the White House and Senate Democrats agree to accept large spending cuts. 

Three days after the debt ceiling was raised in 2011, the Standard and Poor’s credit agency lowered the U.S. credit rating from its AAA credit rating and cited political discord as one of the long term risks to the U.S. economy.  

That fiscal showdown over the 2013 debt ceiling, packed with “downgrade” and “default” bullets, clearly has the potential to resurface again sometime before the anticipated debt ceiling deadline of May 19th.

In the meantime, there are a couple of other short-term fiscal challenges that will likely concern investors in the coming weeks. 

Politicians on Capitol Hill have until March 1st before “across the board” automatic spending cuts kick from the sequestration cuts which were enacted from the Budget Control Act, signed into law by President Barack Obama on August 2, 2011.

The sequester cuts were previously intended to to begin on January 1st, 2013 but they were postponed until March 1st during the “fiscal cliff” drama.

Sequester cuts are the unintended consequences of the “super-committee” failing to come up with their own deficit-reduction plans in late 2011.

The sequester cuts are targeted at reducing spending in defense spending as well as with entitlement spending (E.G. health-care).

Politicians on Capitol Hill also have until the end of March to pass a bill to fund the government.

Last year, the House and Senate passed legislation to fund the federal government through March 27, 2013. 

Threats to “shut down” the U.S. government were used successfully in the past for political gain and it could resurface again in March 2013.

 

 

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