To the relief of financial markets from the Far East to London and by now Wall Street, the congressional leadership appears to have a debt limit deal to hand. Assuming that it gets approved by both Houses, however, the debt problem is simply moving onto a different level rather than being resolved.
There's still a danger that the current imbroglio over debt limitation will result in a downgrading of the US debt by credit rating agencies. That's less serious than would have happened in the event of a default, but lenders could interpret it as signaling that the US is no longer risk-free in terms of debt repayment.
More significantly for those of us more interested in the impact of the debt issue on ordinary people, there's a lot of politics still left to flesh out the details of the debt limit agreement. There's still room for revenue enhancement and a portion of the spending retrenchment will come from the rundown of US involvement in Iraq and Afghanistan. But that still necessitates a big bite out of federal domestic spending.
Whatever the distribution of the eventual fiscal retrenchment that will follow a debt limit deal, the effect on the economy is likely to be contraction. There is a school of economic thought which argues that fiscal austerity brings expansionary ben