September 29, 2013
Shut'er Down?
By Brady Willett
The battle lines have been drawn, and the U.S. is lurching towards its first government shutdown in 17-years. On one side are the crafty Republicans, so fed up that Obamacare is about to become a reality they are willing to stake their political lives on stopping it:
“House Republicans pushed through a spending plan early Sunday morning that would delay Obamacare for a year and repeal its tax on medical devices.” CNN
And on the other side are the Democrats (who control the Senate) and President Obama, who has pledged to veto any attempt by Congress to touch the Affordable Care Act. Exactly how this battle ends is completely unknown, and yet as every day passes the odds of a government shutdown this Tuesday are on the rise.
“Today Republicans in the House of Representatives moved to shut down the government.”
White House
So What Does This Mean For The Markets?
Since 1976 the U.S. has encountered “17 government funding gaps and shutdowns” (AP), none of which has crushed the markets. In fact, during the last such closures (1995 and 1996), the markets rallied on both occasions. In short, although harmful to many families and, potentially, the U.S. economy over the short term, the odds of a government shutdown sparking a market meltdown are remote.
This said, there are key difference between a shutdown today and the 21-day shutdown in 1996. To begin with, this is the first time a shutdown would arrive only days before the U.S. debt ceiling must be raised (October 17), and the battle lines for raising the debt ceiling were cast during a testy fight back in the summer of 2011 (S&P 500 down 14%). If the government does shut and the debt ceiling debate serves to only harden political positions, the potential for market chaos could quickly rear its head.
Next, there is the Fed, which is lending money at 0% while printing/purchasing $85 billion a month in assets. The reason why the Fed could be an important player is because they are horrifically positioned to deal with any major ripples in the economy or financial markets. If, worst case scenario, the government shuts and the threat of default is in the air, many could start screaming for the Fed to do something to stem volatility and/or avert a market panic. Could or would the Fed take even more radical steps to attack a crisis that politicians basically invented?
Lastly, that today’s potential shut down and debt ceiling slug fest is occurring as the U.S. inches towards a fiscal crisis cannot be forgotten. Granted, the U.S. fiscal deficit has been coming down and with the rating agencies not anxious to downgrade the U.S. further debt no longer makes front page news. Nevertheless, if today’s political battles spark a more serious economic slowdown, the idea of U.S. debt being at unsustainable levels could quickly come into focus.
Reuters: “The price of thinly-traded credit default swap contracts, which might have paid out if the U.S. government missed its debt payments for an extended period, jumped to 62 basis points, which was the highest since the worst days of the global credit crunch, according to data firm Markit.”
In short, while shutting the U.S. government down is, if absorbed independently, a low risk event, that so many other problems threaten to saturate market confidence is deeply troubling...deeply troubling for Republicans, the President, workers, The Fed, rating agencies, investors, etc, etc.