FEW AMERICANS WOULD ARGUE that our annual federal budget deficits are unsustainable. What people do argue about is what to do about them. Last week, a bipartisan White House commission released its preliminary plan to cut the growth of the federal debt by $3.8 trillion by 2020, according to Bloomberg. And, of course, the sniping about the plan began as soon as it was released.
 
To be sure, the plan was bold. Sacred cows were skewered and, according to a co-chairman of the committee, “We have harpooned every whale in the ocean and some of the minnows.” Here are a few of the commission’s suggestions:
 

• Raise the Social Security retirement age to 69 by about 2075
• Reduce or eliminate the deduction for home-mortgage interest
• Reduce farm subsidies
• Lower and simplify individual tax rates
• Lower the corporate tax rate to 26%
• Reform medical-malpractice law
• Slow the growth of the Medicare program
• Cut the federal workforce by 10%
• Permanently ban congressional earmarks
• Cut $100 billion from military spending

The potential economic ramifications of last week’s news are, to put it mildly — huge.

Three big things happened that could have long-term effects on your portfolio and your financial well-being. First, on Tuesday, the Republicans scored a major victory in the mid-term elections and now have the upper hand in shaping the legislative agenda over the next two years. Should they succeed in cutting taxes and reducing spending, it could usher in a new era of fiscal conservatism that might cause short-term pain, but could lead to long-term gain. On the other hand, we could just end up with gridlock, finger-pointing, or compromises that please no one. 

Second, on Wednesday, the Federal Reserve cranked up the printing presses again and announced that they will buy up to $600 billion of additional Treasury securities by the end of June 2011, according to MarketWatch. In a November 4 Op-Ed piece in The Washington Post, Fed chief Ben Bernanke justified the action by saying, “Easier financial conditions will promote economic growth… lower mortgage rates will make housing more affordable and allow more homeowners to refinance… lower corporate bond rates will encourage investment… higher stock prices will boost consumer wealth and help increase confidence.” On the other hand, some critics suggest that this action will lead to high inflation, a weak dollar, and perpetuate global imbalances, according to CNBC.

Then, on Friday, the Labor Department reported that the U.S. economy created 151,000 jobs last month, which was well above the forecast of 60,000 jobs, according to Bloomberg. On top of that, the previous two months’ payrolls were revised upward to show 110,000 more jobs created than previously reported. Could the U.S. economy finally be on the cusp of a new wave of job creation?

The net result of these three sweeping things was that stock prices roared to their highest level in more than two years, according to Bloomberg. In addition, yields on two- and five-year Treasury notes dropped to record lows and gold prices surged to all-time record highs. Whew!

Barry Knapp, chief U.S. equity strategist at Barclays Plc in New York summed up the week very nicely by saying, “The elections point to the stabilization between the government and the private sector. The Fed purchases will go on for at least seven months, and the stronger-than-expected payrolls report creates an encouraging macro-environment going forward.”