At the annual Jackson Hole Federal Reserve symposium, Fed governor Jerome Powell Warns About Failure to Raise Debt Ceiling. “Economic shock from U.S. being unable to pay its bills is not something we need right now.”
Further adding to the unwarranted drama, New York Times writer Gretchen Morgenson says Shut Down the Government, and This Time, Investors Will Care.
“If we have to close down our government, we’re building that wall.”
So proclaimed President Trump at a rally in Arizona on Tuesday, raising the specter of a federal government shutdown if Congress fails to provide the money to put up a wall between Mexico and the United States.
In recent years, government shutdowns have become so common that markets have either embraced them or shrugged them off. But as investors absorb the possibility of a closure this fall, market tremors are likely to intensify, experts say. The past will not necessarily be prologue this time around.
That’s the view of Isaac Boltansky, director of policy research at Compass Point Research & Trading in Washington.
Early on in shutdown history, investors reacted very negatively. Closures in 1976 and 1977 coincided with 3 percent declines in the S. & P. 500.
Mr. Boltansky looked back at the stock market’s performance during all 18 government shutdowns, starting in 1976. He found that the Standard & Poor’s 500-stock index averaged just a 0.6 percent loss over the course of those closures.
As investors grew more accustomed to shutdowns, they seemed to become more blasé about them. During the mid-1990s and the 2013 closure, for instance, stocks actually rose. They gained 3.1 percent during the 2013 stoppage.
The ripple effects resulting from a government shutdown are likely to be significant. Investors who have grown used to stock prices that only go up might want to strap themselves in for a bumpy ride.
Shutdown Q & A
Morgenson asks “How can the Federal Reserve Board begin to normalize monetary policy, as it has said it would, amid a government closure?”
Curiously, it would seem to be automatic. The Fed would stop reinvesting interest paid if it didn’t get paid interest. Even if it did get paid interest, why would it have to reinvest the interest as it does now? And by not reinvesting interest, the Fed’s balance sheet would shrink.
Boltansky said that if there is a shutdown, “It will confirm one of the market’s fears that the Republicans are not a political party but a government coalition made up of leadership loyalists, conservatives, and moderates.”
Isn’t that obvious already?
Nonetheless, Boltansky added: “If you have that dynamic, how can you get anything done legislatively?”
Isn’t the inability to get anything done also obvious?
What does this have to do with the stock market anyway? It can go up or down for any reason at any time. Sometimes the market rises in shutdowns and sometimes it doesn’t, and the reasons may not be related to the shutdown at all.
The final kicker in this drama-added scenario is this simple fact: No one believes Trump’s bluffs anymore.
Will Trump really stop government if he does not get the wall? If so, what happened to his promise to get Mexico to pay for it?
The last time a shutdown happened, Republicans took all the blame and nothing good came from it. They will not want to repeat that fiasco.
Massive Hypocrisy
Trump says he wants a clean bill increasing the debt ceiling with no spending reforms.
What ever happened to the idea we need to shrink the deficit and balance the budget? It’s a permanent case of next year, next year, next year.
Finally, please note that Trump does not really want a “clean bill”. Rather, Trump wants the bill to include funding for a wall that he says Mexico will pay for. That lie is now exposed.
The immigration problem isn’t due to lack of a wall. The problem stems from giving free money, free food, free healthcare, and free education to illegals who get in.
Why don’t Republicans who are in control of both houses of Congress and the presidency do something about that?!
Will Investors Care?
Perhaps there is a minor delay in passing a ceiling. But the odds of a prolonged shutdown are close to zero. Someone always blinks. The Republicans have bitter recollections from their last attempt.
With that, let’s return to Morgenson’s opening gambit “This Time, Investors Will Care”.
Will they? How will we even know?
The stock market is massively overvalued and could collapse as much as 40% for any reason or none at all based on simple valuation.
Related Articles
- Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble
- Reader Asks: Can the Bubbles Last Forever?
- Tracking the Amazing Junk Bond Bubbles in the US and Europe
- Median Price-to-Revenue Ratio Higher in All Deciles vs 2007, 90% vs Dot-Com Bubble: THE Choice
This fake drama over the debt ceiling isn’t worth popping a bowl of corn to watch. There may be stock market gyrations but debt ceiling drama will not be the reason.
Mike “Mish” Shedlock
The federal government owns huge gold and petroleum reserves, one-third of the US landmass, thousands of office buildings, etc. The idea that it can run out of money due to the debt ceiling is ludicrous.
LikeLike
Yes but Detroit owns a beautiful railway station and still… An asset is only worth what cash flow it produces.
LikeLike
+1000
The US government owns a lot of useless sh!t, but they haven’t a clue what to do with it — if they did they wouldn’t be in the bankrupt mess they are in.
Venezuela has lots of oil reserves, but they also have socialists running the place. That’s why they are screwed.
LikeLike
When anyone associated with the Fed says a thing is “not something we need right now,” you can be pretty much 100% sure it is exactly what WE need right now.
A serious shutdown, serious enough to raise realistic doubts in treasury bond holders’ minds about whether they’ll ever get repaid, would raise rates. As rates are artificially suppressed, them rising is one thing WE exactly need. Right now.
And, as one of the side effects of artificially low rates, are overvalued assets…. again, a thing that bring them closer to correct valuations, is exactly what WE need.
The optimal level for both rates and asset prices, are always (as in truly always. Meaning per definition) the ones that arise in an unmanipulated, free market. Not something entirely different, pulled out of thin air by some Fed hacks, that can only exist in an ever more crassly manipulated world. Hence, anything that moves either variable in the direction of said free market clearing levels, are per definition what WE need.
Of course, hidden behind the Fed Newspeak, lies the underlying not-to-be-spoken-of, that those the Fed refers to as “we,” are a very different crowd than WE as in most/almost all Americans. The “we”‘s the Fed refer to, meaning the coquetry of banksters, government hacks and other well connecteds the Fed aims to serve with all their actions, very well may “not need” market clearing anything. As things being manipulated explicitly to ensure they get to rob the rest at will, suits them all just fine.
LikeLike
Illegals are not eligible for any government welfare program. K-12 education is the only thing they are entitled to by law. They also cannot be turned away from hospital emergency rooms, but they are responsible for paying the bill. Some illegals manage the welfare benefits of their children if the children are US citizens, but benefits do not extend to the illegals.
BTW, when did we stop caring about ALL the lazy people sitting on their asses collecting welfare? Now we only care about the illegals? End welfare.
LikeLike
Nonsense.
In California illegals 19 years of age and younger are entitled to Medi-Cal – the equivalent of Medicaid.
And illegal females & hubby who drop their kids (anchor babies) in US hospitals are entitled to received ALL forms of welfare, to include free housing, medical, food stamps, etc….
PLUS the labor laws are not being enforced. In fact, when Jerry Brown debated Kashkari for Governor he told Californians that illegals needed driver’s licenses so they had a way to get to work in the morning. So the top political leader in the state endorsed the open violation of state and Federal labor laws while inviting more illegals to enter the state.
LikeLiked by 1 person
“They also cannot be turned away from hospital emergency rooms, but they are responsible for paying the bill”
Are you joking?
Go ask a bill collector about tracking down dirt-poor illegal foreigners w/ no SSN, most of whom use bogus aka’s when receiving general medical care in the emergency room. For $50,000 surgeries their bills get written off by the hospitals – meaning that you pay for it in your insurance premiums and deductibles. Go talk to hospital administrators about it like I have. It costs us billions of dollar annually.
Try to get those benefits and care next time you travel to Cabo or Cancun and get sick and need emergency treatment. See what the Mexican hospital staff tells you: “Cash on the barrel head please before we can render treatment”.
LikeLike
Building the wall was one of the most, if not THE most, attractive campaign promises that attracted voters to Trump. Americans are tired of the non-stop flood of indigent illiterate illegals coming into our country. NO nation ever became prosperous by importing illiteracy and poverty. The wall would become a symbol of America sovereignty, a concept that has been maligned and attacked by the establishment for the last 30 years.
“The immigration problem isn’t due to lack of a wall. The problem stems from giving free money, free food, free healthcare, and free education to illegals who get in.”
You forgot one of the main attractions for illegals: JOBS. Our state and Federal labor laws are not being enforced. Otherwise law-abiding contractors are FORCED to hire illegal foreigner workers (and thereby violate our labor laws) survive in business since their competitors have undercutting them w/cheap labor for YEARS without any threat of punishment.
All nations protect their workers from an onslaught of illegal foreigners who come to steal their jobs. If illegal immigration was good for an economy – all nations would send out ships to all 4 corners of the globe to bring back foreign illiterate indigents. Name one that does.
There are MILLIONS of good prospective LAW-ABIDING foreigner immigrants overseas who have applied to come to America and work – who are put on hold for a decade or longer because the ILLEGALS have already stolen their jobs and nothing is done to stop it!
So I support Trump shutting down the government if Congress continues to thwart the will of the people. Shut it down!!!
LikeLike
We can debate what our immigration policy should be, but, if you can’t control the borders, you can’t have an immigration policy at all, of any kind. If someone opposes the wall because some will get in anyway, I ask if they have locks on the door to their house? Why bother, since some criminals would get in anyway? Let’s build the wall, and take whatever other steps we need to in order to control the border, and then, and only then, can we debate what the policy should be. Amnesty? Maybe. Increase work visas? Maybe. Both are reasonable enough, but only once you’ve got control of the borders.
LikeLike
i agree . The debt ceiling law is an old one . Any debt increase to the national debt level should be authorized/approved when the budget process is completed not after the liability has been incurred. More disconcerting is why the reported annual budget deficits do not equal the cumulative figure(i.e. gross national debt) .
https://wolfstreet.com/2016/10/01/why-u-s-government-deficit-numbers-are-a-big-lie-national-debt/
LikeLike
“Economic shock from U.S. being unable to pay its bills is not something we need right now.”
U.S. debt 20 trillion.
That quote is a broken record. Who would ever say we need an economic shock right now, regardless the day, month or year? It doesn’t prevent one from happening, though, when things get out of whack.
LikeLike
“What ever happened to the idea we need to shrink the deficit and balance the budget? It’s a permanent case of next year, next year, next year.”
That’s another broken record. Neither political party has any intention of balancing the budget, let alone paying down any of the 20 trillion debt.
LikeLike
Time to raise taxes. A VAT would be a good solution, time dated. Such taxes seldom do as much harm to consumers as critics suppose, since the vendor usually absorbs the added tax in order to maintain the price of the item. Since Trump wants to give corporations a tax holiday he should consider countering that with a VAT (on foreign made goods?.
Zero APR is the same principle on the flip side, rather than lowering the price of a car they give lending incentives. A careful selection of products and services would relieve pressure on low income consumers and effectively tax the rich. Added bonus they could probably get the Democrats on board and that might make them look like something other than the party of sedition.
LikeLike
Sorry. That’s not how I run my business. Anytime the government decides to increase the costs of operating the business, prices increase to our customers. The notion that our business would “magically” absorb increased costs without increasing prices is a fanciful notion quite a few politicians & economically illiterate people seem to believe as fact. Businesses exist to provide goods & services to others at a profit. remove the profit, there is no business, no jobs, & no taxes being paid by the business, employees or customers.
Increasing taxes, regulations or any other cost to a business necessarily increases the cost to the customer.
LikeLike
or you could offer financing packages, ‘no interest until 2025!’, or you can downsize your product, (selling golf carts and calling them cars), and its the reason there really is no inflation, consumers cannot afford it, the seller has lots filled with automobiles, or worse yet chickens with short expiration dates, and you hope Janet Yellen will buy several thousand maybe, or that Congress will pass a law like Germany’s outlawing old cars (7 years) or you just dump your product in the ocean and call it a one time charge, not a charge against operating earnings. existing housing is another gambit, where value relative to new housing represents a discount because economic policy wants new housing old housing is just the same money getting handed around. the consumer has a certain leverage in the process and the consumer gets screwed in due course. but if we dont pay for spending with revenue we will always be passing a debt ceiling extension for spending we already (monetized)
LikeLike
Reblogged this on World4Justice : NOW! Lobby Forum..
LikeLike
The Federal government has a unique advantage over the rest of us in that it has a blank cheque available to buy anything it desires that is for sale. It can never go bankrupt in the ordinary course of events.The constitution does not constrain it, but the idiots in Congress can change it with laws such as having a debt ceiling.
This debt ceiling is 100% unnecessary. It is not a fundamental and can be changed at will by Congress. It cannot be ignored, but it can be deleted by changing the law. This is obviously what should happen!
LikeLike
Neither major party actually wants to balance the budget, but they both enjoy making the other party’s life more difficult by being an obstacle when the time comes to raise the debt ceiling. That’s why I’m a Libertarian – they really do want to balance the budget.
LikeLike
Blessed are the children who will inherit the debt the baby boomers leave behind unpaid
LikeLike
–> “The immigration problem isn’t due to lack of a wall. The problem stems from giving free money, free food, free healthcare, and free education to illegals who get in.”
+1000 … except our blog host forgot to mention that we the taxpayers get smacked by withholding taxes and estimates, while the illegals western-union their illegal wages “back home” without contributing a thing.
Make the illegals pay for food, healthcare, education, and make them pay withholding like citizens do. Then we won’t need a wall, the leaches won’t want to come.
LikeLike
“The Fed would stop reinvesting interest paid if it didn’t get paid interest.”
The Fed does not reinvest interest received from the government. They keep enough to cover expenses and turn the rest (profit) back over to the Treasury. They have returned over $90 billion in each of the last 2 years.
LikeLiked by 1 person
My cousin at Treasury told me they had to add a third shift so they could print more money to cover the shortfall in case of a shutdown.
LikeLiked by 1 person
Does anyone even care? Not me that’s for sure. This people are so completely full of shit. Let them all get scalded till after the first of the year maybe even till election time so everyone running gets thrown out and so on and so on. Hold their pay too.
LikeLike