Government Shutdown Could be Scary For Markets

As of midnight EDT the U.S. Congress failed to pass a continuing resolution forcing a partial government shutdown.

The most peculiar part of the story is that apparently there is a majority of Republicans in the House of Representatives willing to pass a clean bill without any delay to the implementation on the Affordable Care Act (Obamacare) but a vote was not called. This is peculiar because Speaker of the House John Boehner (R-Ohio) reportedly did not want this fight over the budget, preferring to use the threat of defunding Obamacare in the upcoming debt ceiling debate.

But a shutdown is upon us and there will be consequences.

The CFTC put out a release today detailing its contingency plan in case of a government shutdown. I have been critical of the CFTC in its implementation of Dodd-Frank but throughout have acknowledged the tremendous work that law created for them. How much work had to be diverted to put together a contingency plan to deal with a forced government shutdown? Now think of the dozens of agencies having to do the same thing. Do you think some of staffers tasked with putting together plans like this one are on the list of non-essential workers who will be furloughed as a result of a government shutdown? What a fun job that must have been. According to the release, 28 of the CFTC’s 680 employees, have been identified as excepted from the restrictions of the Antideficiency Act. If that is typical of other agencies it stands to have a pretty dramatic impact across the country.

But here is the scary part, pun intended. As of midnight we are in October. This is not only the month that includes Halloween but five of 10 of the worst single day moves in the Dow Jones Industrial Average. Bad, really bad, days in the stock market have a funny way of occurring in October. And we are setting ourselves up for some volatile markets. Not only for us but for the world.

This budget battle is only a prelude to the debt ceiling debate that must be expanded later this month or the United States would face defaulting on our debts.Congress went all the way to the brink on the last debt ceiling debate and unfortunately I do not believe the Tea Party Congress people understand what they are doing when they choose to allow the United States to default on its debt. They are choosing to have the United States default on its debt.

We have written about the risk on/risk off nature of markets and the dollar. While frustrating for traders, the underlying principle is good news if you are an American. And that is: when things get scary in the world, the world puts its money into U.S. dollars because it is the safest most secure place.

Some people complain about quantitative easing but it was a necessary step and more importantly it is possible for our Federal Reserve to do these extraordinary things to keep our economy going despite all our fiscal problems because the U.S. dollar is the reserve currency of the world. Considering our debt, without that fact we would be in serious trouble. Yet there are those in Congress who would put that at risk. While printing money to manage your way through fiscal problems may not be the most prudent course of action, it is nice to have that option.

The good thing about markets is that they are a better forecaster than most pundits. I have a feeling the markets will be sending folks a message shortly.

 

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