Congress approved a debt-limit compromise that prevents a U.S.default, sending the measure to President Barack Obama on the daythe Treasury had warned the nation's borrowing authority wouldexpire.

The Senate voted 74-26 for the measure, which raises thenation's debt ceiling until 2013 and threatens automatic spendingcuts to enforce $2.4 trillion in spending reductions over the next10 years. The House passed the plan yesterday.

Passage ends a months-long battle over spending that consumedCongress as lawmakers and the Obama administration negotiated tothe last days to avert a potential default. Still, the compromiselegislation defers decisions on the nation's finances to abipartisan panel of lawmakers and may reduce government deficitsonly modestly while slowing economic growth.

“Finally, Washington is taking some responsibility for spendingmoney we don't have,” said Lamar Alexander of Tennessee, thethird-ranking Senate Republican. “This is a change in behavior fromspend, spend, spend to cut, cut, cut.”

Second-ranking Democrat Dick Durbin of Illinois said his votefor the plan “does not come without pain” because it will reducefunds for disease research and education programs for poorchildren. Lawmakers must “be prepared to raise revenue” in futureefforts to cut the deficit, he said.

House Vote
The House voted 269-161yesterday for the measure, which raises the $14.3 trillion debtceiling enough to fund the government until 2013 and threatensautomatic spending cuts if a bipartisan committee doesn't identifyreductions that Congress will accept.

For all the anxiety in Washington over the debt debate andaverting a default of the nation's financial obligations, investorswith the most at stake made more buying Treasury securities in Julythan any month this year. They made $183,000 for every $10 millioninvested.

Investors snapped up Treasuries in the $9.34 trillion market,driving yields on 10-year notes — a benchmark for everything frommortgage rates to corporate debt — to the lowest levels sinceNovember.

The yield on the 30-year Treasury bond dropped below 4 percentfor the first time since November.

Yields on benchmark 10-year notes dropped seven basis points, or0.07 percentage point, to 2.68 percent at 11:59 a.m. in New York,according to Bloomberg Bond Trader prices. The 3.125 percentsecurities maturing in May 2021 rose 18/32, or $5.63 per $1,000face amount, to 103 26/32.

Stocks extended losses. The Standard & Poor's 500 Index fellfor a seventh straight day, losing 1 percent to 1,273.74 at 11:54a.m. in New York. The Dow Jones Industrial Average fell 92.82points, or 0.8 percent, to 12,039.67.

Long-Term Savings
The legislation fallsshort of the long-term deficit savings that Obama initially sought.The political obstacles to reaching even the lower target areformidable, though the measure's sanctions improve prospects “abit,” said Peter Orszag, Obama's former budget director.

“The fundamental problem is that we are hyper-polarized, andthat does not go away,” said Orszag, now a vice chairman ofCitigroup Inc. and a contributor to Bloomberg View. “This deal isnot going to solve that.”

Senator Mark Warner, a Virginia Democrat, said yesterday theagreement fails to address the “core problem” of how to overhaulthe tax system and curb spending on entitlements such as Medicarethat drive the deficit. Still, he said, he was voting for itbecause “it helps us avoid default.”

Bill Gross, who runs the world's biggest bond mutual fund atPacific Investment Management Co., said the debt ceiling compromisewon't make a “significant dent” in U.S. deficits.

Treasury Debt
“In addition to an existingnearly $10 trillion of outstanding Treasury debt, the U.S. has anear unfathomable $66 trillion of future liabilities at net presentcost,” Gross wrote in a monthly investment outlook posted on theNewport Beach, California-based company's website today.

Representative Paul Ryan, a Wisconsin Republican who is chairmanof the House Budget Committee, said today on CNBC that lawmakersmust confront spiraling costs of entitlement programs.

“Medicare is driving itself into bankruptcy; Medicaid isbankrupting states,” Ryan said. “Our health-care entitlements arethe core driver of our debt. Programs need to be reformed andstrengthened if they're going to be saved.”

A $917 billion down payment in discretionary spending reductionscontained in the measure is back-loaded so more than two-thirds ofthe cuts come after 2016. The spending reduction next year is $21billion, less than two-tenths of a percent of U.S. gross domesticproduct.

JP Morgan Chase
Amid signs that theeconomic recovery slowed almost to a standstill earlier this year,Michael Feroli, chief U.S. economist for JPMorgan Chase & Co.,said he expects the spending cuts next year to “add modestly” tothe drag on growth from expiring provisions of theeconomic-stimulus package and the scheduled Dec. 31 end of atemporary payroll tax cut.

While the measure specifies the $917 billion in discretionaryspending cuts over 10 years, the rest is left to a panel of 12members of Congress, split evenly between the two parties.

That “super-committee” is supposed to come up withrecommendations by Nov. 23, with a guaranteed up-or-down vote byCongress to prevent obstruction through parliamentary maneuvers. IfCongress doesn't act, automatic spending cuts begin in 2013.

History of Failure
Still, the sanctionsrun up against a history of failure when Congress has tried tomotivate itself with threats of penalties. No Congress can bind asuccessor, and the impact of sanctions relies primarily on thepolitical embarrassment of reversing course.

The 1985 Gramm-Rudman-Hollings Act set enforceable budgettargets that Democrats credit with pressuring Republican PresidentRonald Reagan to agree to tax increases. Still, during the fiveyears of the law, the spending reductions required were reduced inone case by Congress and in another overridden by a subsequentbudget agreement.

Among the sanctions that would trigger political pushback ifCongress didn't meet its goals is an automatic cut of up to $500billion in military spending, which would come on top of $325billion in defense-spending reductions already in the deal.

Military Cuts
“If the American military iscut as much, in the worst case, as the proposal would cut it, it'sthe beginning of the end of America as a great internationalpower,” Senator Joseph Lieberman, a Connecticut independent, saidon the Senate floor yesterday.

While the new joint committee will have broad jurisdiction toreduce the deficit through both spending cuts and tax increases,congressional rules present obstacles to using the Bush-era taxcuts to meet that goal.

The Congressional Budget Office's revenue baseline assumes thosetax cuts will expire as scheduled at the end of 2012. Republicanswant a future revenue level equal to extending all the cuts, whilethe administration wants to raise about $1.8 trillion above thatlevel over the next decade by letting tax cuts for only high-incomeearners expire. Measured against the CBO's yardstick, eitherapproach would be viewed as a tax cut, not deficit reduction.

Though White House press secretary Jay Carney said the committeecould choose to use a different yardstick, at least one Republicanwould have to agree for majority support.

Bloomberg News

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