POTENTIAL MELTDOWN (6)

Europe is dominating the (bad) economic headlines at the moment. But a time bomb is ticking away in America, and that should not be forgotten.

The August deal that allowed the raising of the federal debt ceiling included a conscious decision to ignore the most difficult issue, namely how to cut the federal Government's huge and continuing budget deficit. The problem was handed over to a bipartisan committee consisting of 6 Democrats and 6 Republicans, three each from the House of Representatives and the Senate. They have to agree, by 23 November, savings of US$1.5 trillion over 10 years. If they can agree, then the proposals are put to both chambers on a straight yes-no vote; if they can't agree, then US$1.2 trillion of spending cuts automatically kick in, split evenly between defence (dear to Republicans) and domestic programmes (dear to Democrats).

The latter is an Exocet provision, designed to encourage cooperation. Yet cooperation is the last thing that both parties have on their mind at the moment. The Democrats believe (rightly) that the country's budget problems can only be solved through a mix of spending cuts and tax rises. But a large number of Republican legislators have pledged never to vote to raise taxes, and they appear to mean what they say.

So, things seem to be back where they were at the beginning of August, the only difference being that the U.S.' credit rating is no longer the AAA it used to be. A fudge will probably found to keep things going, at least until next year's Presidential election is over and done with; but the price of that fudge may well be a further credit downgrading.

Walter Blotscher