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QUEST MEANS BUSINESS

U.S. Passes Debt Ceiling Hike; Italy, Spain in Debt Crisis

Aired August 2, 2011 - 14:00:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


RICHARD QUEST, CNN ANCHOR, QUEST MEANS BUSINESS: A deal is done without hours to spare the U.S. Senate passes a bill to boost the debt ceiling. It scores no points with the Dow which is down 180 points.

And the pain in Spain, it is Zapatero off the plane. The prime minister is forced to delay his holiday.

I'm Richard Quest, live from Washington D.C., and yes, I mean business.

Good evening from the U.S. capitol.

It has been a harrowing few days, but at least, for now, it seems to be over. With just hours to spare a plan to make sure the world's biggest economy can make good on its debt commitments is headed to President Obama's desk. He's expected to waste no time in signing it into law. He can't waste any time because, frankly, there is no time left. Just over an hour ago senators approved the plan by a vote of 74 to 26; a healthy majority over the 60 that they needed.

Mr. Obama said it shouldn't take a serious situation like this to get Republicans and Democrats to work together. The president has until midnight tonight to sign it into law, ensuring that U.S. debt obligations are met.

The bipartisan plan, this is the detail: It will increase debt ceiling by up to $2.4 trillion, if all goes according to plan. That should cover borrowing needs up 2013. There are, of course, strings attached. And the plan requires spending cuts of at least $2.1 trillion over the next decade.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: So, we've seen in the past few days that Washington has the ability to focus when there's a timer ticking down and when there is a looming disaster. It shouldn't take the risk of default, the risk of economic catastrophe, to get folks in this town to work together and do their jobs.

Because there is already a quiet crisis going on in the lives of a lot of families and a lot of communities all across the country; they are looking for work, and they have been for a while. Or they are making do with fewer hours or fewer customers, or they are just trying to make ends meet. That ought to compel Washington to cooperate. That ought to compel Washington to compromise and it ought to compel Washington to act. That ought to be enough to get all of us in this town to do the jobs we were sent here to do.

(END VIDEOTAPE)

QUEST: Ambassador Robert Kimmitt was U.S. deputy secretary of Treasury under George W. Bush. He is now senior international counsel for international law firm, WilmerHale. He joins me now.

We just heard that President Obama has signed the bill into law, whew!

(DESK BELL CHIMES)

That's worth a bell. The debt ceiling will be-has been raised, and now the U.S. can get on with the business of deficit reduction.

ROBERT KIMMITT, SENIOR INTERNATIONAL COUNSEL, WILMERHALE: It is a first step, Richard, but only a first step to restoring fiscal discipline in the United States. As you said, the debt ceiling will be raised by $2.4 trillion, which means at the end of that authority we will have a debt to GDP ratio of over 100 percent. So we are only on the way toward fiscal discipline, we have not reached that final goal.

QUEST: What do you think the affect of the spending cuts will have, because we know that there will have to be cuts, but now is not the time to be introducing them. But that was forced upon both sides.

KIMMITT: Well, I think that first we have removed a major negative. That is we have taken uncertainty out of the market. We haven't yet produced a positive-

QUEST: Well, hang on-

KIMMITT: I think there will be some drag on the economy, but I am of the opinion it is going to be closer to 0.1, 0.2 percent.

QUEST: 0.1-you say uncertainty has bee removed out of the economy, but it was artificially inserted in the first place, with the political process, wasn't it? The debt ceiling should have been raised on a clean bill, without any discussion of deficit measures. And that should have followed up.

KIMMITT: Richard, the heart of the question, the messier the process in the United States. We have been through these debt limit fights for 25 years. The decision is always made on the last day. But here is the important point. We are focused on the issue of our time, the role, the size, the cost of government. So, it didn't surprise me that it took time for people to come to grips with this existential issue for both the U.S. and the global economy.

QUEST: If that is right, and I think you are right, it is happening in the U.K., it is happening across Europe, and in Asia, as well. But if that is the case, then we have to look forward to six months of more turmoil, and beyond as this super committee does its work.

KIMMITT: Well, we have a process that moves forward on that track. First the Congress has to pass an appropriations bill for the new fiscal year-

QUEST: Right.

KIMMITT: -begins September 30. Second, they have to come up with their plan, including new cuts by year's end. But that is just one track. The other track is we have got a find a way to produce pro-growth policies, in the U.S. and in the global economy.

QUEST: What would you like to see more of? Because we know that in this political arena-I mean, you were obviously in a Republican administration, so you are obviously perhaps looking for-for what? A reduction in corporate tax limits?

KIMMITT: I think what we need to do is take a broad look at the U.S. tax code. I think it needs to be simplified. I think we do need to lower the corporate-

QUEST: Even though it is the lowest already amongst many major countries? At one point it was at the bottom?

KIMMITT: Well, it is either the first or second highest in the industrialized world, depending on how you view Japan's. But it is still higher than any corporate tax rate in Europe right now. I think it needs to be lowered.

But secondly, our tax code is much too complex. We need to simplify it and we need to consider a broader array of making sure that revenue supports our spending goals that are set by the Congress.

QUEST: To my viewers tonight, because you are obviously a man who is steeped in Washington. You have been around. You know how to work these halls of power very well indeed. Tell my viewers and me tonight, why is the U.S. political system not broken, just because you managed to cobble together a deal at the 59th minute, of the last hour, of the last day?

KIMMITT: Again, I think we are addressing the essential issue of our time, the role, the size, the cost of government, when you are dealing with tough central issues like that it takes time to find the compromise. And you are right, on debt limits, on spending bills, and I would also say on sovereign debt decisions in Europe, we are almost always at the precipice before the decision can be made. I wish it were different. But I think in our industrialized, democratic, political systems, we need a deadline to focus attention, to generate creativity and to produce the results. And thus far we are producing the results.

QUEST: Ambassador we need a deadline and I have reached mine with you. I hope you will forgive me.

KIMMITT: (UNINTELLIGIBLE) Thank you.

QUEST: Good to have you. Thank you very much indeed, Ambassador Kimmitt.

Now, yesterday Fitch said it would wait until a deal was done before commenting on a downgrade. Now, that the deal has been done, it says, and I quote, in the words, bear with me, "the risk of a sovereign default remains extremely low. While the agreement is clearly a step in the right direction the U.S., as in Europe, must confront tough choices on tax and spending. If the deficit is to be cut to safer levels over the medium term." So, Fitch confirms the United States has a AAA debt rating but reviews it over the longer term. We await hearing from Moody's and S&P.

Mohamed El-Erian of PIMCO, a friend of this program, calls the debt crisis a self-inflicted wound on the American economy. The PIMCO chief exec was talking to CNN Money's Poppy Harlow, who asked him for his take on the deal that has been signed, as I just told you, by the president.

(BEGIN VIDEOTAPE)

MOHAMED EL-ERIAN, CEO, PIMCO: American society today is worse off after this whole debt ceiling debacle than it would have been otherwise. Not only has this been a self-inflicted wound that we manufactured out of the blue, but in addition it makes it much more difficult to achieve what the people looking for fiscal reforms are trying to do, which is medium term sustainability.

POPPY HARLOW, CNN MONEY CORRESPONDENT: Those are very strong words, "a self-inflicted wound"; manufactured out of the blue". Are you saying that this country did not have a debt crisis on its hands? That this debate, this debt ceiling debate did not need to happen, whatsoever? That this was just pure politicking that has put us in a worse economic situation?

EL-ERIAN: So, we created an artificial deadline. Let me explain. I think most people would agree we are not Greece, we are not Portugal. We don't have an immediate issue. Our creditors are willing to lend to us. Interest rates are historically low. And importantly, our maturity profile stretches out quite well. So we had a medium-term fiscal issue that requires a coherent response.

Along comes the debt ceiling. Now remember the debt ceiling is very arcane. Every year the Congress gets to vote on the budget. So, it gets to approve, or in this case it hasn't approved, we have continuing resolutions, but it gets a say on the budget. The U.S. is one of two countries that in addition has another element, which is the debt ceiling. So what the debt ceiling did, because of the politics, not the economics, but because of the politics of Washington, is it brought forward all these medium-term issues, tried to squeeze them into a very short-term period and with the lack of leadership out of Washington, D.C., we had a total debacle. A debacle that hit confidence and a debacle that has undermined not only our growth outlook but also our standing in the global economy.

HARLOW: This would have sounded crazy a year ago and you may say it still does, but looking for a safe haven at this point in time is very difficult if you look at traditional safe havens. Whether it is U.S. Treasuries, even gold, whether it was the U.S. dollar, would it be fair to say that a safe haven at this point is more investing in emerging economies, than it is investing in U.S. Treasuries?

EL-ERIAN: As absurd as that would have sounded, and absurd as it may sound today, that is certainly a view we have at PIMCO. But I would qualify it. You have to mix and match safe havens. So don't rely on just one safe haven. The way we think of it is the following: Think of this can. In the old days investors could just rely on what was written on the can. And the can said U.S. Treasuries. Therefore we all assume if it is U.S. Treasuries it is a safe haven. Today we have to go inside the can and ask what is in the can. And the key thing about the safe haven is a clean balance sheet. And the U.S. right now does not have the cleanest of balance sheets. So as an investor you have to mix and match various safe havens, go global, so not only U.S. Treasuries but look at other places that have better balance sheets. And there are many. It's Norway. It's Germany. It's Brazil. It's China. It's Mexico, believe it or not. And mix and match something that not only says safe haven on it, but actually has safe haven in it.

(END VIDEOTAPE)

QUEST: Mohamed El-Erian talking to Poppy Harlow, and you can hear plenty more views on the debt ceiling and the rest of the issues facing the world economy. It is at CNNMoney.com.

So as one debt crisis nears a solution, another rears its head once more. The bond market turning on Italy and Spain, and a prime minister's holiday won't be the only casualty. QUEST MEANS BUSINESS, we are live-

(DESK BELL CHIMES)

-in Washington.

(COMMERCIAL BREAK)

QUEST: In Spain the Prime Minister Jose Louis Rodriguez Zapatero is postponing his vacation after Spain took a down dangering-a dangerous and damaging hammering on the bond market. There is trouble for Italy, too. Jim Boulden is at CNN London.

Jim, for goodness sake, out of the pan into the fire, what happened today?

JIM BOULDEN, CNN FINANCIAL CORRESPONDENT: You know, it is a familiar story. Higher borrowing costs pushing a troubled economy closer to a potential bailout. Well, let's look, bond yields in Italy and Spain hit the highest point since the Eurozone began. For Italy the yield on a 10- year bond rose to 6.13 percent, at one point it hit near 6.25 percent. For Spain, 6.3 percent, at one point going close to 6.5 percent. Germany, of course, going down and what this means is that we have this safe haven, ever more money going into Germany. And that means we get ever closer to a 4 full percentage point difference between Italy, Spain and Germany.

It also means they are moving closer to that 7 percent mark that proved so disastrous for Greece, Ireland, and Portugal. Now this is very much about confidence crisis in both countries. Spain has been taking steps to sort things out, of course. Prime Minister Zapatero putting off his vacation to keep a closer eye on things. But last week the IMF said the country was still very much in a quote, "danger zone"; and said that it needed more determined policy choices to win back market confidence. That from the IMF.

Now, for Italy, finance minister, central bank officials, and market regulators got together Tuesday to discuss how the countries should cope. That committee, being chaired by this man, the finance minister, Tremonti- sorry, he's not there at the moment. He should be.

He is seen as the man who is steadying the ship. But there was last minute speculation that he would have to resign because of links to a former aide who is facing corruption charges. He laughed off those rumors last week, but it is still knocked confidence in Italy's economy, Richard.

QUEST: Put it into perspective for me. Italy has done its austerity measures. Spain already did what they thought was going to have to be done. So are these two countries at risk once again? I mean what would it-I suppose what I'm really asking you, Jim, and possibly to answer, what would it take to pour oil on the troubled waters there?

BOULDEN: What they need to do, probably, is get this new fund for the euro. And put more money into it so that the markets will think, if Italy has a problem politically, or paying back its bills, if there is enough money there for this new fund to go in early. Before we get even anywhere close to an idea that Italy can't pay its bills, so it is about more money going into these funds so that everyone can say that Italy will be OK, not matter how bad it gets.

QUEST: Jim Boulden, we thank you for that.

Now, news of the problems of Italy and Spain should get a sea of red that was across the European markets. And these are the way the numbers are looking in Europe tonight. The major markets went the last points for many months. Zurich SMI managed to loose quite the worst losses. It sank to its lowest point since July 2009. It is playing catch up after the swift national holiday. Credit Suisse and UBS both saw losses of more than 7 percent. Reaction to poor earnings figures and the Eurozone banks struggled across the board. The Eurozone, of course, is in some disarray on that.

The Dow Jones industrials up 143 points, at the moment, despite the fact that the Senate has passed, and the president has signed the debt ceiling raising limit, and the, of course, both the spending cuts into force.

Federal Reserve policy makers will meet in Washington next week where they will address the near stagnant U.S. economy. Randall Koszner is a former member of the Fed Board of Governors. Now professor at the University of Chicago Booth School of Business. The professor joins me now live from CNN Chicago.

Professor Koszner, when we look at the, surely, the markets should be happier, they have got a debt agreement. The president signed it into law. The fact that the markets are down is a further indication of what more, more, needs to be done.

RANDALL KOSZNER, PROFESSOR, UNIV. OF CHICAGO BOOTH SCHOOL OF BUSINESS: Well, certainly the numbers that have been coming out over the last few weeks, especially most recently, have not been very good about the U.S. economy. And so, obviously, there are a lot of concerns in the market. But I think the markets are pleased that a deal was done. They did get an agreement. And the cuts are not coming immediately. The cuts start in 2012 and are fairly gradual. We'll have to see what the special committee does. But they are not devastating for federal spending in the short run.

QUEST: All right.

But let me ask, what are you expecting, the cuts to actually the affect that they will have at a time when the U.S. economy is fragile. I have seen anything from 0.1 of a percent to a 0.25 of a percent. To-I mean, well, what is your number that you are working with, do you think?

KOSZNER: Well, the numbers are very small, at least from what I have seen. I haven't read the final version of what the Senate has done, since they have just passed it and the president just signed it. But there are very few cuts on the order of just a few $10s of billions that occur in 2012, really nothing in 2011. And so there is very little direct affect in the short run. And I think even without this debt deal there was very little appetite in Congress for any additional spending. So, I think relative to that benchmark, there is really not much of a change over the next couple of years, we'll have to see what happens with the select committee. But it is a very small impact in the short run.

QUEST: Ben Bernanke put a lot of his capital on the line. He called for this. He was very outspoken about it. We now know, of course, the deal. Look, you are not on the FOMC, and you are not at the Fed, but I'm expecting that the extended period for low interest rates takes us well into next year now. Is that fair?

KOSZNER: I think that is, given the weak numbers that have come out recently, I think that is very likely. I think the chairman is very happy that we avoided it. I think all of us are very happy that we avoided a default, which was by no means necessary, but this deadline was necessary to get some sanity in our longer run fiscal trajectory. But now I've got to deal with some of the shorter run issues. And certainly there are major challenges going forward.

QUEST: Finally, Professor Koszner, do you worry that-yep, you put the fire out, but by jingo between now and Thanksgiving and up to the end of the year, getting this committee, getting the long term cuts, getting a real long-term deficit plan in place is going to be simply difficult.

KOSZNER: Ha, "simply difficult" is a wonderful way of putting it. I think very difficult is the way of putting it. But it is a structure. It is a path towards dealing with these problems. I mean this debate was ugly and unpleasant, but goodness if Greece had only had something like this five or 10 years earlier. They still wouldn't be in great shape, but they would be a heck of a lot better shape. So I think it is really good that we have had this. There is going to be a lot of wrangling. Hopefully we can come up with some pro-growth and pro-jobs tax reforms. And some other reforms that will help us to provide a boost to the economy, both in the shorter, intermediate run, as well as the long run.

QUEST: Professor Koszner, many thanks for joining us from Chicago where I believe probably a little bit cooler.

KOSZNER: Good to see you.

QUEST: And maybe as pleasant, than it is here in Washington. Many thanks. It is boiling here today.

Although, although, on the plus side, a nice breeze coming in. Perhaps off the Potomac, which makes it a little more bearable than it was yesterday.

After the break, the cry is-it's my first child. Not mine! After the scripture from Frances Lui, when he talks about his casino in Macao, after years of love and attention now he has to share it with the rest of us. "The Boss" after the break.

(COMMERCIAL BREAK)

QUEST: There are plenty of bosses up there. That is the U.S. Capitol, the House and the Senate, at one end of Pennsylvania Avenue. At the other end, of course, the big boss, the president, Barack Obama, who has signed into law, the debt ceiling, raising limit, and of course, the cuts. Plenty of bosses in Washington. What about other bosses? Five years and $2 billion later the casino resort, the Galaxy Macao, is ready for launch. And our boss there is Francis Lui. It is a moment of truth. We find out what it took to get here for him. It is time for "The Boss".

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: Previously on "The Boss": Tough love, Francis Lui inspects his casino and his staff as the prepares the launch of Galaxy Macao.

FRANCIS LUI, CEO, GALAXY ENTERTAINMENT GROUP: It is not that easy to redo the image. We know that. So, this is why when we open it has to be ready, 100 percent perfect.

UNIDENTIFIED MALE: His steps are urgent. His smile is broad. For Francis Lui, this is it.

LUI: To see all the teams getting ready. Smiling faces, ready to go, it is really exciting. You can look at the people. Every one of them is so eager to actually start the ball rolling. And rock'n'roll, let's go.

UNIDENTIFIED MALE: In just a few short hours, his $2 billion casino resort, the Galaxy Macao, will open to the public. Five years of hard work come down to this.

UNIDENTIFIED MALE: Mr. Francis Lui, vice chairman, Galaxy Entertainment Group.

UNIDENTIFIED MALE: Inside the casino the media prepare to get their final briefing. For Francis, this is the last chance to articulate his vision and sell his product.

LUI (translation on screen): Some of our key features include 50 restaurants, a whiskey bar, a 3D cinema, and a spa on the top floor.

And we have to ask the customer come and see for themselves, because you can talk up what is your product is going to be.

UNIDENTIFIED MALE: As he proudly showcases the Galax Macao, Francis knows this is as much about him as it is about his product. As the vice chairman, he is the face behind the name.

LUI: I think in the gaming industry you have all of these very iconic characters, personalities, in front of the cameras, and they are basically the face that the customers relate to. And I think in the casino industry, a familiar face counts a lot.

UNIDENTIFIED MALE: Outside in the oppressive heat of the Macao sun, long queues are forming. His customers await the opening of Galaxy Macao. The only new gaming outlet to be opened this year.

UNIDENTIFIED FEMALE: Here is to the success of Galaxy Macao. Cheers!

LUI: Cheers!

UNIDENTIFIED MALE: Today, Francis can stand tall and proud. He has worked tirelessly to get here.

LUI: I treat Galaxy Macao as my own baby, because basically from the inception of the idea, from the vision, from execution, so if you ask me a question, is Galaxy Macao important to me? It definitely is my first one child. I love it.

UNIDENTIFIED MALE: Despite the bonds Francis is all too aware of what follows. He knows being the 34th casino in a territory half the size of Manhattan Island comes with its own set of challenges.

LUI: We know that we have a lot of competition. We have a lot of very good operators in town, too. But we are not shy of the challenges in front of us.

UNIDENTIFIED MALE: To help boost the spirits a traditional good luck charm, Chinese lions to ward off evil.

With confidence, and with a snip of the scissors, Galaxy Macao is officially open.

For those queuing for hours, and for our "Boss" Francis Lui, this is the moment they have been waiting for.

LUI: If you ask me at 4:00 o'clock in the morning, last night, I think our team was still working very hard to make sure we have the very perfect product that we can show our customer today. And I think we just did that.

UNIDENTIFIED MALE: 90 minutes later, and more than 20,000 people have set foot in Galaxy Macao. But for this boss, the real work is only just getting started.

LUI: We see thousands of things that we should be able to improve upon, so that we can make ourselves better. This is just the beginning, not the end, of the journey.

UNIDENTIFIED MALE: Next week on The Boss, no rest for Francis Liu, as he meets with his senior managers to discuss what's working and what isn't.

And in New York, Steve Hindy gets his first glimpse of the gleaming new tank that will help transform the future of his company. That's next week on The Boss.

(END VIDEO TAPE)

QUEST: Coming up on QUEST MEANS BUSINESS, live from Washington, the deal has been done. It's not enough to lift the gloom over Wall Street. Maggie Lake is in New York at the New York Stock Exchange and she'll tell us more after the break.

Good evening to you.

(COMMERCIAL BREAK)

QUEST: Hello, I'm Richard Quest, QUEST MEANS BUSINESS, live from Washington, DC tonight.

This is CNN. And on this network, the news always comes first.

The IMF has welcomed the deal -- the last minute compromise for the U.S. debt ceiling that has become law just hours before a deadline to avoid default. The managing director of the IMF, Christine Lagarde, said by reducing a major uncertainty in the markets and bolstering U.S. fiscal credibility, the agreement is good for both the U.S. and the global economy.

Barack Obama signed the legislation into law a short time ago. It cuts more than $2.1 trillion in spending over 10 years and raises the nation's borrowing limit.

This YouTube video is said to show a mother mourning the death of her son in Hama in Syria. International pressure is mounting against the Syrian government for its crackdown on protests. The U.N. human rights chief is calling the violence there reprehensible.

A Pakistani official says the city of Karachi is enduring, in their words, a reign of terror and bloodshed. Media reports say at least 35 people have been killed there in 24 hours. Officials say there have been nightly gun battles between political, ethnic and criminal rivals.

Spain's prime minister has postponed his vacation for the summer, as a turn -- as they call it, economic crisis in his country took a turn for the worse. The cost of borrowing grew sharply for Spain after investors lost confidence. The interest rate on Spanish debt is now approaching the dangerous levels, well, that forced Greece, Ireland and Portugal into taking a bailout.

Yields on U.S. Treasury bonds are falling on Tuesday, as the fear of a default just about evaporate. The yield on the 10-Year bond is down 13 basis points. It's now comfortably you need 3. It's at 2.62 percent. The U.S. markets aren't reacting quite so positively.

Maggie Lake joining me from New York, outside the New York Stock Exchange -- a very simple question to you, Maggie, why should the markets be down on a day when the deal is signed into law?

MAGGIE LAKE, CNN CORRESPONDENT: Because, Richard, the crisis may be over, but the hard work has yet to be started. And the markets know that. I talked to a trader this morning. He said we are re-pricing for a new reality.

One of the sectors getting hardest hit and leading this market lower, health care. Hospitals, providers, nursing companies, drug makers are getting slammed over fears about future cuts in Medicaid, Medicare. This is where we are. This is all going to be about spending cuts, where it comes down. And you see investors trying to handicap and hedge for that.

I should mention another area we're seeing a lot of pressure, retail and consumer. New numbers out this morning showing American consumers continue to pull back on spending. So anyone with exposure to them is also getting hit.

This economy is fragile right now. What we thought was a temporary pullback is looking like something a little bit more sustained. And against that backdrop, they're going to have to now make these hard decisions about the deficit.

As far as Wall Street is concerned, despite what the IMF said, that means continued uncertainty and continued pressure on stocks. The eighth straight losing day here -- Richard.

QUEST: OK, Maggie. So if we accept that this is going to get messy with the super committee and into the fall but earnings remain good because of foreign operations of companies, are you basically saying -- maybe not you, but the analysts you speaking to -- that we are destined for six months of volatility?

LAKE: That's a good way to put it, churn, because although they're concerned, although they believe it will keep pressure on stocks, they also point out two things. First of all, things -- and we've been talking this for weeks now -- things are bad here, but they look even messier elsewhere. So you still, to a certain extent, have people at least at a loss of where to put their money. So they're still sort of gravitating to certain areas of the US.

The other thing, Richard -- and people aren't really talking about this now, but you will start to hear chatter about this. It's uncertainty. The short-term players don't like that. But the long-term players are saying you all have a situation in the U.S. where both parties are talking about doing something serious on the budget. Yes, there are questions. Yes, it's going to be messy. Yes, it's going to be fraught with politics. But they're talking about getting something done.

Ultimately, some people think that there will be a benefit to that...

QUEST: All right.

LAKE: -- if they do it right. But that's a big if.

QUEST: Maggie Lake outside the New York Stock Exchange.

Many thanks.

One quick mention quickly. Gold has slipped back just marginally. It fell back from a record intra-day high. It hit $1,645.19 an ounce. It's now just you need that. So we would expect, perhaps, if this deal does look like it's going to hold water and it's not going to be too ugly, you would expect to see gold come back somewhat.

Those spending cuts mandated by the new debt agreement is likely to pile pressure on an already fragile U.S. economy. Some private economists say the debt could be up to .25 of 1 percent of GDP in the next year.

CNN's chief business correspondent, Ali Velshi, told me what he thinks the effect will be.

(BEGIN VIDEO TAPE)

ALI VELSHI, CNN ANCHOR: Richard, it's good to have this conversation with you, because I am not as bullish on this as most people are. While it's very clear that the U.S., like many economies in the world, has got to curb its -- its spending habits, many -- and most economists say that the time to do it is not in a nascent and fragile recovery that we have now.

We just saw first quarter GDP come in substantially lower than we thought and second quarter GDP also lower than we expected.

There's no question that there's a -- there's a time -- and maybe now is the time to discuss cuts a few years out. But this -- this obsession with -- with conservative and fiscal conservatives and with Tea Partiers that cuts have to happen now, and, in fact, the complaints from many who didn't vote in favor of this deal, who said it's because there aren't enough short-term cuts...

QUEST: All right...

VELSHI: -- that is very, very dangerous for this economy.

Now, Richard, we were standing to lose jobs if this deal wasn't done. But it's not job creating in any fashion, either. So that's the biggest problem in the U.S., this doesn't create jobs.

QUEST: OK. That may be so, but, obviously, they have now done that deal. The president may have wanted a clean debt ceiling bill. He didn't get it.

So now the question, obviously, is, is there a -- is there another way around it?

What's being talked of where -- that you're hearing of that can negate some of those effects?

VELSHI: Well, first of all, there are -- there are talks underway between the Department of Treasury and S&P and Moody's. They are looking - - the ratings agencies are looking very clar -- carefully at the bill to decide whether a downgrade is coming or not.

But as you know, Richard, that's neither here nor there. The ratings agencies have lost a great deal of influence since the fiscal crisis. And people will price U.S. debt the way they price it.

The more important issue here is that can we get a balanced proposal going forward?

The president's original proposal, which didn't succeed, was for far more cuts, but it was also some tax increases. We don't have that. And that is likely not going to happen with a Republican-controlled House.

So the bottom line is the next step in actually changing something will be the next election and that's at the end of 2012.

I think we're in a stalemate until then.

QUEST: You say we're in a stalemate, but, actually, I tend to disagree with you, because it's worse than that, in one case. You've got six months of potential turmoil with the super committee...

VELSHI: Right.

QUEST: -- remember, the decision of who's on the super committee and what their results are and the sort of Damocles of the automatic sequestrance if they don't make a deal. Now, that is hardly making for good economics, possibly, Ali?

VELSHI: Well, you -- what -- do you not think that a bipartisan committee is going to come to some agreement on -- on what cuts to make, Richard?

That's very cynical of you. Clearly, these six people are going to sit together and come to a quick agreement.

No, you're absolutely right. When I say we're at a stalemate, I mean we're not going to get political resolution. One of the distinctions that you have made for your audience, which is very necessary, is that unlike Greece, which Americans like to say, oh, you know, we're going to be like Greece if we don't fix this, Greece has real structural economic issues. These issues -- this -- this debt ceiling discussion was -- was a political making. It's a -- it's a unique, you know, it's only the U.S. and Denmark that have these debt crisis's and Denmark is nowhere near approaching its debt ceiling.

So we are in a political stalemate, you're absolutely right.

QUEST: Right.

VELSHI: And that will cause uncertainty.

The bottom line is, I'm not sure the uncertainty stops anybody from doing anything. It doesn't engender confidence and faith that anybody should do anything better, because, once again, we want to know what happens in terms of tax increases, tax cuts, spending cuts, again, until Christmas. It will keep you and me busy...

QUEST: All right...

VELSHI: -- but it won't -- it won't -- it won't move the ball economically.

QUEST: Ali Velshi, who's calling me a cynic.

What's he going to call me next?

Our chief business correspondent. Well, I'll give as good as I get when we get back to Q&A later this week. See who wins on Q&A, huh. That will sort the men from the boys.

Let's turn our attention to where real priorities and importance lies. Coming up after the bake -- after the break, tens of thousands may already have died. Somalia desperately needs help to feed its people. We'll be live in Mogadishu and with how the rest of the world is respond to the crisis.

QUEST MEANS BUSINESS.

Good evening to you.

(COMMERCIAL BREAK)

QUEST: The prime minister of Somalia has issued a desperate plea for help. He told CNN that the international community must intervene to save his people. According to the U.N., tens of thousands of people may already have died of starvation.

CNN's Nima Elbagir has made the difficult and, frankly, dangerous journey to the Somali capital city, Mogadishu, and Nima joins me now -- on your travels there, Nima, give us an idea of what you've seen what you've heard, please.

NIMA ELBAGIR, CNN CORRESPONDENT: Well, Richard, it feels like so many people around the world are talking about Somalia, they're talking about the famine and the humanitarian catastrophe here in Mogadishu. But on the ground, things are only getting worse.

The Somali prime minister, you mentioned there, was speaking to us earlier. He says they need more aid. Frankly, they need it quicker. And they need it as soon as people can get it to them.

He also sent out a plea to the militant Al Shabab group, who have -- who have issued an edict banning aid groups from operating in areas potentially starving around two million people, according to U.N. estimates. And he -- he's asking them now to allow aid groups in, Richard.

This is what he said to us earlier.

(BEGIN VIDEO CLIP)

ABDIWELI MOHAMED ALI, SOMALI PRIME MINISTER: The problem is the insurgency that are holding people hostage, that are making people captive and not allowing the relief agencies' relief to reach them. So, therefore, we appeal to them to allow the international relief to reach these people.

(END VIDEO CLIP)

ELBAGIR: Meanwhile, Richard, we are in the second day of the Islamic holy month of Ramadan, traditionally a time when the al-Shabab launch an incredibly fierce offensive. We're already feeling that here. And the worry is that what little aid is trickling in could be jeopardized by the fresh fighting -- Richard.

QUEST: All right. So, Nima, in short and long, what is required?

What do they want?

ELBAGIR: Well, you know, everybody is talking about this famine as if it's suddenly crept up on people. There have been drought warnings year over year leading up to this. There have also been warnings year on year about how the security situation in Somalia really is untenable. So what the Somali prime minister and the Somali government are asking for is support for the African Union force, the 9,000 strong force, which is battling alone to maintain the zones in Mogadishu and secure the areas and the aid delivery to the displaced people. They really feel like now is the time for the world to step up, support them, and once and for all, help them win the battle against the insurgency and fundamentally save people's lives -- Richard.

QUEST: All right. Nima, many thanks, indeed.

Meanwhile, joining me there from Mogadishu, joining me here in Washington, Dr. Raj Shah, the administrator of the United States Agency for International Development.

Administrator, what specific help is the U.S. -- or increased help -- is the U.S. going to give as a result of the famine that we've just been talking about?

RAJ SHAH, ADMINISTRATOR, USAID: Well, I think it's worth noting that over the last 10 months, the United States has been responding aggressively. And we've invested more than $460 million in emergency support, in food and health interventions for affected populations.

We're in a situation where 11.5 million people throughout the Horn of Africa are at the risk of hunger and starvation. We believe our programs, specifically, are reaching more than 4.6 million people and helping them stay afloat throughout the Horn and in Somalia, specifically.

QUEST: So as a result of what we're now seeing specifically with this latest second famine, which is now -- it looks like it's reaching major parts of Somalia, are you going to be calling for more aid?

SHAH: We absolutely have. Two weeks ago...

QUEST: Are you going to be providing it?

SHAH: We absolutely are. We -- two weeks ago, a week-and-a-half ago, I was in the Dadaab camp in Kenya meeting with Somali refugees. I met women and their kids, who had traveled more than 30, 40 days by foot and were barely on the edge of survival.

It is really important right now that the entire global community come together to provide as much humanitarian assistance as is possible, but also important to recognize that the current famine is specifically in those areas that are in con -- controlled by al-Shabab. And the issue of humanitarian access is critical...

QUEST: So...

SHAH: -- safe and unfettered access to necessary and affected populations.

QUEST: So the prime minister, when he calls, as he has done just now to CNN, for the insurgents to allow aid to be taken, what other pressure can be brought to bear to allow aid, because they clearly don't care if their own people drop dead of starvation?

So it's up to the rest of the people to actually man -- the rest of us to manage to find aid and ways.

What other pressure can be brought?

SHAH: Well, right now, the United Nations is leading a dialogue with the (INAUDIBLE)...

QUEST: Ah, leading a dialogue.

SHAH: Well, they (INAUDIBLE)...

QUEST: -- leading a dialogue. Dialogue

SHAH: It's important...

QUEST: You'll be talking until the people are dead.

SHAH: No, they've actually secured some access to certain parts of South and Central Somalia and -- and there are NGOs, mostly European NGOs, that we and other partners support that have been active there. They absolutely need more space in order to reach more people. And it's critical at this point in time, for them to get supplementary foods and health interventions to children, in particular, because they're the most vulnerable.

But we have been very forward leaning, providing almost 50 percent of the global response and doing everything we can to help more than four million people actually not fall into acute famine conditions by supporting safety net programs...

QUEST: All right...

SHAH: -- supporting the health...

QUEST: All right.

SHAH: -- of their livestock and enabling them to get food and water

QUEST: To...

SHAH: -- in their communities.

QUEST: To Americans who have just witnessed...

SHAH: Yes.

QUEST: -- one of the most extraordinary events here on Capitol Hill, on the debt crisis, to Americans who say, look, we've got so much here, we understand we have to send help and aid there, but we're sending aid and help to people who are fighting each other and can't even solve their own problems. Surely, if the fighting stops, then we're in a better position to help. It's a very -- it's a -- it's a simplistic point, but it's a tantaliting -- tantalizingly interesting one.

SHAH: Well, it's absolutely true that we need more humanitarian access in affected areas. Al-Shabab has made some positive comments, encouraging the international community and indicating that they will allow access -- unfettered access -- to cur -- critical populations. It's important that they live up to those statements and it's important that the initial expanded services that are trying -- that are being provided by the World Food Programme and others safely get to the people...

QUEST: All right...

SHAH: -- they're trying to reach.

QUEST: Do you have any idea yet -- well, this is an impossible question. The deal has only just been done. The ink is not dry on the president's pen from signing it into law. But obviously, spending cuts of up to nine -- over $900 billion are coming, discretionary cuts are coming in.

Do you know if your department is going to take a hit?

And, if so, how much and will you be arguing it -- for it to be as little as possible?

SHAH: Well, President Obama has elevated development as a core part of your national security strategy. We see, in the Horn of Africa, and Somalia specifically right now, the interrelationship between providing humanitarian support and development support and the key national security issues that are being affected in that part of the world.

So we expect that Congress will support the president's budget requests...

QUEST: Will you argue...

SHAH: -- and...

QUEST: You'll be on the Hill saying...

SHAH: -- and we'll be on the Hill making the case that we can spend these resources efficiently and effectively, get real results. And, ultimately, it is so much cheaper for us to invest in smart...

QUEST: All right...

SHAH: -- results oriented development than deal with famines, failed states and food riots after the fact. And we know that that is the way to save real resources over time and to protect our national and economic security.

QUEST: Raj Shah, good to have you on the program.

Nice to see you.

SHAH: Thank you very much.

QUEST: It's nice to see you.

SHAH: Bye-bye.

QUEST: Thank you very much for joining us.

Raj Shah of the administration there joining us here in Washington.

We turn our attention now, we do need Jenny Harrison at the World Weather Center to bring us up to date -- and, Jenny, I think it's -- it's only right and proper that we do start with an idea of the sort of crisis.

Jenny Harrison will be with us.

We'll be asking her the sort of crisis weather that they face in just a moment.

(COMMERCIAL BREAK)

QUEST: QUEST MEANS BUSINESS live from Washington today.

Jenny Harrison is at the World Weather Center -- Jenny, it's you and me and a good afternoon to you, Ms. Harrison.

JENNY HARRISON, CNN METEOROLOGIST: Mr. Quest, 34 Celsius for you right now. Yes, I know you're probably getting used to it. But I'm actually going get into some tropical weather, too, in just a moment. Luckily you haven't got that where you are. Clear skies in Washington right now.

But, of course, it's about the heat. It has been extending its way -- or will do -- suddenly eastward as we go through the next couple of days. Very humid air, as well, of course. The winds are coming up from the south, the very warm waters of the Gulf of Mexico.

This is some of the temperatures on Monday. These were records reached for these particular locations on this day, obviously, of the month, of the year. Forty-four Celsius there. The average is 34 for Port Smith in Arkansas. And as you see, all these temperatures in the 40s. So getting on for a good 10 degrees above average.

Then, of course, you've got to factor in the humidity. So there are widespread advisories and warnings for this heat, in particular, the Central Plains States, as we go through the next 24 hours. Dallas for the next few days, again, temperatures should be in the low 40s. The average is 35 for this time of year. And look at the temperatures, too, in Oklahoma City -- 42 Celsius. The average of 34.

Now, there have been a few showers and thunderstorms, generally further to the north, where it came right across the Great Lakes, as you can see there. Always a scattering, though, of showers, maybe the old thunderstorm across the South this time of year. Fairly typical. And then going forward, you can see, again, more showers and thunderstorms in the Southeast. And then a line of activity working its way across the Northeast.

But we are now looking to the Caribbean. Here it is, the next Tropical Storm. This is Emily. Winds already just over 70 kilometers per hour. The storm itself, right now, it's about 345 kilometers to the south- southeast of San Juan and Puerto Rico. So it's a fair way out, as you can see. But that is the general forecast track. And, of course, it is expected to strengthen over the next couple of days. You can see there, expected to head across the Dominican Republic on toward Haiti.

All of the computer models pretty much in agreement. It looks like the Dominican Republic and Haiti are going to see the brunt of this in the next couple of days. The warnings are already in place right now for a tropical storm and that is what is expected as the storm heads in that direction.

But look at the rains it's produced already -- just torrential amounts in the last 24 hours. Luckily, it's now moving away from the Leeward Islands, as you can see there. But 147 millimeters in Martinique in, literally, as I say, just 24 hours.

Now, the winds are very strong but particularly strong around the center. It's a fairly small storm, but it does mean for some very, very dangerous -- these high waves, as well, of course. And it's some torrential rains that will be working their way across the Dominican Republic in the next 48 hours. We could easily see 250 millimeters of rain. And the danger there, of course, is always not just the flooding, but the flash floods and mudslides.

We'll keep a very close eye on all of that -- Richard.

QUEST: We thank you, Ms. Harrison, and for bringing me up to date with the weather forecast and the temperatures here in Washington.

I can tell you that just by looking at that.

Tonight's Profitable Moment.

With a stroke of the pen, Barack Obama has drawn a line and in the phase that most of Washington would like to forget. As phase one ends, phase two almost begins immediately. Congress will catch up on its collective suntan for the next few days and weeks.

Now, the balance of power shifts to the air conditioned super committee chamber.

Over the fall, it will agonize over where the ax should fall. It is the implementation that will decide if this plan works for the American people. That is what left Europe's recovery in tatters. That is why Spain, Italy still struggle long after Europe trumpeted its own deals. And that is what we should look for in the future. The battle of Washington is over. The deficit war begins.

And that is QUEST MEANS BUSINESS for tonight.

And from Washington, I'm Richard Quest in the American capital.

Whatever you're up to in the hours ahead, I do hope it's profitable.

"WORLD ONE" is next.

Thank you.

END