Wall Street pays money to make you stupid about economics. It makes money by not being stupid. Hedge fund managers know that contractionary policy is contractionary.
So while our Galtian overlords get to keep their Bush tax cuts, people are going to exit the market with that money for now because the future got a lot clearer with the debt ceiling deal:
- GOP Senate Minority Leader McConnell has vowed that there won’t be another clean debt ceiling bill. This means that a default is more likely. U.S. Treasuries are the bedrock of the world financial system. Now they are less bedrocky. If the EU wasn’t in crisis, I imagine the dollar would no longer be the reserve currency
- The US government will not act to increase demand (i.e. decrease unemployment) in the short or medium term. This means less profits for industry. It also means less tax revenues for the federal government, which, again, undermines Treasuries.
- The US government may have to raise taxes in the medium term. This is contraindicated in this economy and may lead to even further loss of confidence in the dollar, in Treasuries, and in demand.
- Remember, the Fed is basically out of the game. Monetary policy is, more or less, exhausted at this point.
- There is no prospect of housing making a comeback.