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Sequester's defense cuts represent next big threat to economy

This wasn't supposed to happen.

Congress passed the budget control act of 2011 as an attempt to impose discipline on itself so that it could bring needed fiscal discipline to the budget debate. The need was genuine, as the rising national debt and the ineffectualness of Congress were at or near crisis levels. The law demanded that if Congress failed to cut the budget by agreement, they would trigger automatic and draconian across-the-board budget cuts. In order to make sure they did not fail, the automatic budget cuts were made intolerable by design. Nevertheless, when confronted with the need for a true bi-partisan solution, Congress decided that the intolerable wasn't all that intolerable after all.

To put a finer point on it, our representatives decided that it would be better for us to face the intolerable than for them to face the possibility of being replaced by extremists within their own parties for the crime of cooperating with the enemy.

That's all ancient history now, but it is important because Congress remains the only body that can fix the sequestration mess, and as recent developments indicate, it is quite a mess indeed. Thanks to a New Years Day deal, sequestration was delayed by two months and is now scheduled to go into effect March 1. We now have 18 days left, which is troubling in itself, but the matter is even more urgent than it seems. Its consequences, including the tangible degradation of our military readiness, have already begun.

The Defense Department is suffering from pre-penury paralysis. Because they don't know whether or not sequestration will occur, they cannot prepare for either eventuality. If sequestration is to be avoided, the deal will almost certainly involve cuts to some defense programs, but no one knows which, and if sequestration is allowed to happen, no one knows how long it will last.

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.