I hope all my dear readers had a relaxed and an enjoyable weekend. The much anticipated clash between Chelsea and Liverpool in the English Premier League lived up to its expectations and provided fans and viewers alike some outlet for expression. The Reds won the match at Stamford Bridge after huffing and puffing their way towards an unlikely win after being locked at 1-1. The Reds have certainly looked a class apart since Kenny Dalglish took over the reins. Now, the league taking a break for a week, it’s back to some serious business and the newest problem to embrace the US economy: US Budget Deficit Situation.

Investors may be in for a rude awakening if Congress is divided on its promise to reduce the widening US budget deficit. The congressional super committee created to cut $1.2 trillion in federal spending over 10 years was likely to accept failure in its efforts. All hope is not lost though as a breakthrough could still happen before the committee’s Wednesday midnight deadline. However, it is unlikely that the committee could bridge differences over taxes and spending. It is worth to acknowledge how the financial markets will react to such a lack of progress, partly because investors have been distracted by Europe’s impending debt crisis. Investors also opine that any budget cuts would not take effect until 2013, so a failure would not trigger an immediate government shutdown.

Moody’s Investors Services has said a failure by the committee to reach an agreement would not by itself lead to a rating change. However, Fitch Ratings has not ruled out a ‘negative rating action’ on the US if the economy grows less than expected or if the committee fails to agree on at least $1.2 trillion in deficit-reduction measures. Such an action would likely to be a revision of the US rating outlook to negative from its current position of stability. When S&P downgraded the US in August, it said at the time that US fiscal plans fell short of what was necessary to stabilize debt dynamics.

The biggest concern here is not the cuts but indifferences between Democrats and Republicans who are simply unwilling or unable to compromise and make the tough decisions required to bring a deficit that’s near 10% of GDP under control. Clashes between the two political parties over the right mix of spending cuts and tax hikes almost finalized a deal to lift the debt ceiling in August, raising the threat of default and enticing Standard & Poor’s decision to cut the United States credit rating. 

The parallels between USA and Europe’s debt-ridden nations have become more striking and harder to ignore. The US is treading a path similar to the one that led Italy, Greece and others to trouble: borrowing money at low interest rates to boost short-term growth and swelling the debt burden. The financial markets will likely face unquestioned gloom and desperation if the US follows Europe’s path. If that happens, the world may not be the same again….