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Joe Barbieri has Bachelors' degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 13 years, with over 10 years on the institutional side of the business. He has covered positions from Fund Accounting to Investment... More
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  • Will The U.S. Government Shutdown Lead To Bigger Problems? 0 comments
    Oct 10, 2013 11:13 AM

    Up until now, the U.S. government shutdown hasn't lead to very many problems. The stock market is still buoyant, the services from the government are still being provided and nobody seems to be in that much of a panic. Is this all there is to this story? There are scenarios being painted that suggest very dire consequences, but these are remote possibilities.

    One should still be wary of what might happen, so that if perceptions change quickly, something can be done to minimize the effect. The first question being asked by some people is: What if this shutdown leads to a bond default? (2)(3) If this default happens, so what? This possibility is not being entertained that seriously, but the logic makes sense. If someone is not paying their short term expenses and they are essentially reneging on them, why would long term expenses be any different? There is also an argument that even if long term interest payments were not made, they would be made up for in the future. (3) You would have to have a lot of trust to believe that this event would not change your perception just s tiny bit. If you owned a U.S. Treasury bill that had always paid the interest on time, and one day, you received a statement indicating that your interest would be paid two months later, what would you do? If the answer was "wait and see" and you did get paid two months later, wouldn't something tell you that the reliability of the interest payment has now been damaged, and that you will need extra cash in case it happens again? If this were to happen on a global scale, wouldn't there be a similar reaction? Since the whole financial system is built on trust instead of assets, isn't this playing a dangerous game? After all, you can trust someone for decades, and someone does one stupid thing, and that trust is destroyed - usually for a long time. What about the idea of a credit downgrade? This is essentially saying the same thing - the credit rating is a "trust rating" of how reliable you are in paying your debts. Paying the bills is not the only place where trust is a factor, as is being demonstrated in trade talks, (1) collateral for futures payments, (3) reputation risk, (4) and economic consequences. (5)

    So what do you do about the shutdown situation? You can react swiftly and dump all of your bonds, but then what? Where could you put money that wouldn't be affected? This question is not easy to answer, because everything is connected. If you are feeling squeamish about Treasury Bills, have the money as close to cash as possible. If cash becomes suspect, you may then have to move to hard assets, like metals, property or some asset that produces other hard assets like a business. The outcome is very uncertain, so it is wise to have money in different areas, both government related and not.

    Sources:

    1) http://www.reuters.com/article/2013/10/06/us-eu-us-trade-analysis-idUSBRE99503D20131006

    2) http://www.bloomberg.com/news/2013-10-06/u-s-to-default-if-debt-ceiling-not-raised-lew-says.html

    3) http://www.kitco.com/news/2013-10-07/KitcoNews20131007NC-Treasurys-As-Collateral-Could-be-Impacted-If-US-Government-Defaultshtml.html

    4) http://news.xinhuanet.com/english/china/2013-10/07/c_132777458.htm

    5) http://www.businessspectator.com.au/news/2013/10/10/us-economy/us-crisis-risks-global-growth-oecd

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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