It may seem a strange question to ask, whether the American government’s financial shutdown really matters. After all, the media is full of portentous reports. Descriptions of laid off government workers and fears that American society will somehow grind to a halt. But it’s a valid question. And one that makes us consider the relevance of Government to the real economy and investment.
But firstly, what is actually happening with this shutdown? Well, the federal government in the United States has shut down because Congress (the House of Representatives and the Senate) failed to pass a budget before the start of the financial year on October 1st. What’s really behind the argument is that the Republican-controlled House has passed a spending bill that maintains spending levels and does not provide funding to implement Obamacare, the much argued scheme to mandate government organised medical insurance.
The effect of the shutdown is that non-essential services are being progressively closed, such as national park opening, internal revenue audits and health and safety inspections. How much the last 2 services will be missed is debatable. It’s estimated that around 800,000 federal employees have been laid off to date.
However, nearly all so-called essential services continue. Active military personnel continue to be paid, Social Security checks sent out, although a little slower, and so too payment of unemployment benefit and food stamps to the 47 million recipients. And ironically, Obamacare will continue to roll out. All hardly a disastrous situation and it’s still largely business as usual for the American government. The Treasury Department has said that it would simply delay payments, paying only those bills it can afford, using daily tax revenue.
For the recovering American property market, the effect of the shutdown is likely to be minimal, at least in the short term. This is because the American government doesn’t issue loans; they only ensure some of them. And only a relatively small part of the wider property market. The Federal Housing Administration currently endorses about 15% of the entire single-family mortgage market and this department has announced that they will continue endorsing loans, although with more limited staff.
The financial markets don’t seem to be particularly spooked by the shutdown. After all, there have been 17 similar shutdowns since 1976. The longest was for 21 days in 1996. It’s interesting to note that Stocks ended higher in 65% of the shutdowns with an average gain of 0.7%.
How long the current shutdown will continue is anybody’s guess. As Members of Congress keep getting paid during a shutdown because of the 27th amendment to the US constitution, there is hardly a lot of personal financial pressure on them to do a deal. Judging by the past, it’s unlikely to last longer than 2 or 3 weeks, as many voters are likely to start complaining to the representatives about the disruption and re-election is always a primary concern of politicians.
But there is a shadow looming over these events, namely the American government’s need to raise the national borrowing limit. It must seek authority to raise the limit; otherwise government spending will be severely curtailed.
At present, the American government owes, and get ready for a big number, $16,747,478,675,335. It’s simpler to say they owe nearly $17 trillion. That America needs to raise this humongous figure says a lot about recent administrations inability to control spending. The date by which a new debt level needs to be agreed is October 17th and if this isn’t achieved, along with failure to agree government funding, then it could be a double whammy to consumer and market confidence.
It’s our view at property4peanuts that the present US government shutdown is only a symptom of a wider problem in America of out-of-control government spending. Obama, with his background as a “community organiser” and professional politician, is hardly well positioned to appreciate what really makes business work, or to understand that it’s private enterprise that creates jobs, not government.
It might be said that Obama is only pushing along a tendency to grow government that has happened across the Western world. When there’s a problem, the media bleats “what’s the government going to do about it?” Politicians have to be seen to be doing something, and so even more laws are passed and taxes and red tape are increasingly imposed upon productive people.
There is an inherent momentum to this process too. As the net of government largess spreads, there is hardly a family that now doesn’t have someone in it was a recipient of government benefits. As more join the payroll, so grows the inbuilt voting bias against cutting those benefit programs. That makes it tough for any political party to propose stopping the music and getting real and so we arrive at the huge figure above of 17 trillion, that needs to be raised to keep the party going.
Eventually, there will be a reckoning in America and in other over indebted countries. It’s simply not possible for the American government to pay back what they owe, at least not honestly. They can either default or inflate their way out. Our guess is on the latter. But whether they can control the genie of inflation, once it’s released, is another matter. The experience of many other countries who had to print money to pay bills, as America has been doing for some time now, is that inflation turns into hyperinflation, such as in the in famous currency devaluation in Germany during the Weimar Republic in the 1930s. In such situation, holding hard assets like houses, farmland and gold will prove valuable.
Looking on the bright side, America still has a lot going for it. It’s a huge country exceptionally well endowed with natural resources, to the extent that it’s heading back to energy self sufficiency. Despite the growing collectivism of recent years, there is still a strong independent and entrepreneurial streak in the population. The excessive bubble of the growth of government is likely to be punctured by its simple inability to finance further growth and the unbearable weight of interest payments on its huge debt when rates rise. This process won’t be pleasant, but it could well finally drive home the point that Eastern Europe and Russia so painfully learned in the last century, namely that government does not create wealth and happiness. Quite the opposite. This could bring about a reboot in America to more realistic and productive attitudes.