The US economy's real GDP growth rate remained 1.3% in the 2nd quarter ended on June,2011. In the previous quarter it was 0.4% only. The danger of default has been averted but S&P has downgraded US credit rating by one notch to AA+ with the outlook negative. Previously it was AAA by S&P since 1941 and by Moody's since 1917.
Now the question is that though the deal between Republicans and Democrats has averted the danger of default on payments due by removing the debt ceiling restrictions on the government. It enabled the government to borrow the money needed to meet its due payments obligations but are the problems for the economy have gone for good.
As the govt has promised to cut the budget deficit to bring into range at the time of the parleys with the Republicans for an increase in debt ceiling of $2.5 trillion in exchange for $2.5 trillion in expenditure reductions over the next 10 years with no tax increases.
If there will be cut in spending to reduce budget deficit then it will result in slow down in the already slowly growing economy at just 1.3% growth rate . This can put US back into recession but the president has promised to cut. If the promise is not kept on one excuse or the other, though it is too much difficult to do so, it will result in high inflation which has already infuriarated the general public . US citizens have got a large chunk of their incomes eroded due to inflation in the recent years. Unemployment rate is still very high while increase in income level is very very slow vis-a-vis inflation.
The more important thing is that where will be the cut in government spending, defence is the obvious option but any cut in defence budget will severely hurt the American's operations around the globe against terrorists to make lives of American people safe. It will also erase the successes so far achieved. US will have to start the war afresh from zero again. This can give ample time and space to the terrorists to regroup and strengthen themselves which is not desirable at all.
Then what's the answer.The answer should be that Repulicans should accept the ground realities around the globe and should not insist on spending cut in the budgets to come. Though for the time being it will result in a bit higher inflation but the resulted growth in the economy will more than compensate the income erosion caused by inflation but in the long run the people will be in the better position.