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Shutdown Q & A: Unwarranted Debt Ceiling Drama, Republican Hypocrisy

Courtesy of Mish.

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?”


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