The Government Shut-Down That Wasn'tOctober 01, 2013 Posted by: Joe Morgan, CFA
As I put fingers to keyboard, the government is shut down. The question before us is, does it matter?
Let us take a huge breath, set aside politics for a moment, and look at some facts of the situation: There have been 18 government shut downs since 1976. Yes, 18, so we average about one shutdown every two years. Most of these occurred in the 1970s and 80s and the most recent one was 1996. In fact, Reagan experienced eight of those shut downs with Carter closely behind at six.By some estimates I’ve seen, today’s government shutdown probably affects about 800,000 workers out of the 14 million (including contractors). So much of government activity has been deemed “essential,” that the phrase quickly becomes a misnomer.Fears of another debt crisis are contained, as measured by credit default swaps on Treasuries. The credit premium paid for insurance against a U.S. default sits at 0.33 percent, far from the high of 0.65 percent reached in the 2011 debt crisis. In fact, this measure has been sitting at pre-crisis levels throughout the summer and only began to rise in the last couple weeks.
Source: Arbor ResearchThe stock market is actually up on the news of a government shut-down. What does this say about government’s affect on the economy?
Politics being politics, I expect the current issues to be resolved quickly, though perhaps not before the so-called October 17th date when the debt ceiling is reached. Fears of that date are widely exaggerated as this is the date the government “runs out of money” if paying all bills at their assumed time.
But, like any business or person, the government can prioritize their payments. The Treasury Secretary has great flexibility regarding who to pay and when.
Considering the Treasury brings in about $150 billion in revenue per month and interest payments total about $25 billion per month, it’s difficult to see a potential problem with Treasury bond payments. In fact, if we get to the point of prioritizing payments, it may be quite telling how those priorities shake out.
Instead, this will be another round of political brinksmanship that will, in the end, add nothing...Read More