The US Has A Massive Spending Problem

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THE GOVERNMENT SHUTDOWN:

Even though Congress previously agreed to raise the total debt ceiling until 2025, how they actually allocate that money is another matter entirely. In “typical” situations, these budgets are agreed upon by September 30th so that all spending is predetermined throughout the following fiscal year - and if that doesn't happen - we have a government shutdown.

Under the anti-deficiency act of 1884, “federal agencies cannot spend or obligate any money without an appropriation from Congress.” Therefore, if there’s no bipartisan agreement by September 30th, federal agencies must cease all non-essential functions. This includes "the collection, processing, and dissemination of government data, including employment and inflation figures," of which the Federal Reserve needs to make it’s next rate hike decision on November 1st.

WHY IS THIS HAPPENING?

The House Of Representatives has not been able to compromise on a spending bill that would then be sent to the Senate. Even if they can come to an agreement, it's likely that they'd send it to the Senate, who would immediately deny and send it back.

The White House said that “active-duty military and federal law enforcement personnel would be forced to work without pay until funds are appropriated, FEMA’s Disaster Relief Fund could be depleted,” and everything else from TSA, to the FDA, to nearly every federally funded agency would be impacted.

Fortunately, according to Barrons: ”A government shutdown likely would have to run at least three or four weeks in length for the collection and dissemination of data to be impacted to a degree that would leave the Fed flying blind ahead of the November meeting” - and, the chance of that realistically happening isn’t impossible - but, there’s absolutely a chance.

THE IMPACT TO THE STOCK MARKET:

The worst Government Shut Down drop occurred in the 1970’s with stocks down almost 4% - but, in late 2018 while the Government was shut down for over a month, the markets rallied over 13% - so, from that perspective, it seems as though it doesn’t really matter.

Government shutdowns are also more common than people think - for example, “there have been 20 federal-government shutdowns since 1976, with the longest dragging out for 34 days in 2018 to 2019. The average has lasted for only eight days.” Plus - since 1976, the SP500 “has been higher during 10 of those shutdowns and lower during the other 10….so, Its average return is exactly 0.0%.”

The real issue, to me, is that a government shutdown would likely lead to a loss in confidence throughout the economy - it signals that we don’t have unity within the United States - and, on a deeper level, the real impact falls on government employees who will either have to work without their full pay, or get furloughed until things resume back to normal.

CREDIT RATING DOWNGRADE:

As Moody’s just pointed out, “While government debt service payments would not be impacted and a short-lived shutdown would be unlikely to disrupt the economy, it would underscore the weakness of US institutional and governance strength relative to other AAA-rated sovereigns that we have highlighted in recent years Looking ahead, weaker fiscal policymaking that leads to persistently high fiscal deficits and higher than expected interest costs would put pressure on the US rating or outlook” - implying that - it’s just a matter of time until it happens.

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