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It has been the main topic of conversation on all news media outlets.  Everyone is weighing in on the debt ceiling and government shutdown debate, and the possible consequences for stock markets, state governments, and the world economy.   To begin measuring or anticipating the possible impacts, one must first look to history to see if anything like this has occurred before. 

If you have been following the stories about the debt ceiling, you will know that many politicians and others have claimed this will be the first time the United States will not pay its creditors on time, or will default on its debt.  This is simply not true; it has happened twice before in our nation’s history.  The first was in November of 1814, just a few months after the British conquest of Washington, D.C. during the War of 1812, when the Treasury was unable to move enough precious metal to service its debt, and missed interest payments on bonds.  The next default occurred in 1979 when a long-winded debate and debt ceiling deadline pushed Congress to send the Treasury large amounts of paperwork at the last minute. The Treasury Department was using what was then a relatively new invention, the computer, and was unable to handle the large amount of data in a short amount of time.  This back up caused the government to default on its payments.  Neither of these events was positive, but neither created mass chaos and a breakdown of the nation’s economy.

Now, lets look at another indicator of economic turmoil — the markets.  The most directly effected upon a default is the US Treasuries bond market, which will have a delay of interest payments to investors and will see their yield increase, making them a more expensive form of debt for the government, but not hurting investors. Stock markets around the world are gaining as negotiations continue in Washington, currency markets are keeping the dollar within close range of previous spot rates, and oil and natural gas are mostly gaining or staying within 1% of the previous day’s close.  Another key indicator of economic demise is investor confidence in gold.  On the brink of financial collapse, investors typically put all their faith in solid and valuable precious metals such as gold.  The value of gold over the last month and the last year has gone down, (see graph below) showing that financial panic is not imminent and investors still have strong confidence in markets.

State governments are a bit different than personal or institutional investors, in that state budget offices receive federal funds to run specific federal programs. During the shutdown, states have had to decide what to do with federally funded employees and programs.  Some states have chosen to use state funds and hope the federal government will reimburse them.  North Carolina is one of a few states that is not willing to take that chance and is halting certain services until the federal government is able to pay for those services.  The federally funded programs at risk due to the shutdown are:

  • Supplemental Nutrition Assistance Program (SNAP)
  • Temporary Assistance for Needy Families (TANF)
  • Special Supplemental Food Program for Women, Infants and Children (WIC)
  • Refugee Assistance
  • Low Income Home Energy Assistance Program (LIHEAP)
  • Head Start
  • Disability Determination Services (DDSs)
  • Veterans Benefit Payments

So what is going to happen?  News from Washington seems to lead one to believe there will be a deal struck today between the Senate and House, but it’s just a delay of another roller coaster in Washington.  The most recent deal will fund the federal government until January 15, 2014 and extend the Treasury Department’s borrowing authority until February 7, 2014. So, would letting the default occur be a bad thing?  Today’s financial markets paint a mixed picture, and I think if a true budget plan had been created and agreed upon it would be worth the temporary default.  I believe the longer the uncertainty drags on and the longer the government pushes the problem to later dates, the less the nation’s economy will grow.  Temporary spending plans do not send messages that the government is stable and following a set budget plan.  The longer we see these temporary crisis alerts about sequestration, debt ceilings and budgets, the greater the chance there will be a long term impact on the growth of financial markets and the economy.

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