MORGAN STANLEY ON DEBT CEILING

News out of Washington suggests that a debt ceiling deal might be coming together soon.Apparently, President Obama and House Speaker Boehner have an agreement in principle onthe framework of a package that would include significant entitlement reform, major tax increasesstarting in 2013 and an extension (and possible expansion) of current tax breaks into 2012. Thisis exactly the type of program that is needed from a macroeconomic perspective — long-termdeficit reduction combined with a continuation of near-term fiscal stimulus. The likely marketreaction to such a deal is unclear.