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Identifying the true costs of sequestration as March 1 deadline looms

As the March 1 deadline looms on the horizon, market participants grapple the realistic likelihood of widespread spending cuts across the United States. As such, the impending sequestration is likely to yield far less than the $85 billion in the US budget savings in the short-term. Indeed, this is more reflective of the complex mechanisms the government allocates its resources. However, it identifies the likely scenario in which the spending cuts will ultimately serve as a detriment to and hurt the US economy – this in turn could lower tax revenue and foster heightened costs of social safety-net programs like unemployment insurance.

On the federal side of the equation, the Pentagon would have to pay penalties to suppliers if the sequester forced them to cancel many of their top contracts – hardly the savings panacea bipartisan groups were hoping for. "There is a possibility that we'd save virtually nothing in outlays," wrote Steve Bell, a former Republican congressional aide now with the Bipartisan Policy Center. “Even a relatively small decline in spending would be magnified over the coming years as it would reduce debt-servicing costs.”

In the long-term, the sequester would have little to restrain federal debt because it inevitably fails to curbs health costs, which are projected to climb as the population ages into a larger proportion of the US population. Should these measures be avoided and brinkmanship halted, the federal debt would equal the size of the economy by 2031, according to the Bipartisan Policy Center.

It is important to look at the road taken to this point, principally in the sense that the sequester was not supposed to happen. Recall back in 2011 when Republicans and Democrats set up the deep cuts to military and domestic spending as a worst-case scenario that would force them to reach tough decisions on taxes and spending in order to set U.S. finances on a sustainable course.

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A glance through the mornings institutional research puts AUD in the frame this morning as it looks like Italian situation has lost some of its initial ´momentum´ and entrenched negotiations look set to take place. Better numbers out of Australia indicate that AUD/USD may have bottomed within a range and that the RBA is unlikely to take further action. Elsewhere Abe officially nominated Kuroda, and Bernanke helped to soothe market tensions during his second testimony.
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Forex: GBP/USD in a new lap to the upside

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