The Government Shutdown Myth Averted Again Until 2019

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Includes: IOO, IVV, IWM, OEF, RPG, RPV, RSP, SDY, SPY, VOO
by: Alan Longbon
Summary

The U.S. government shutdown myth is upon us again.

A monetary currency sovereign with a freely floating exchange rate can never go bankrupt or run out of money.

For the U.S. government, any shutdown is because of voluntarily imposed budgetary constraints.

The shutdown has been averted with a last-minute deal that postpones the shutdown for a further two years and adds $300B to the private sector.

The purpose of this report is to show the impact of the recent government shutdown deal and how the additional $300B of spending will impact investment markets.

For the second time this year, another charade went on in Washington. The charade is not new, and it is known as the Government Shutdown. It has just played out again now and can be forgotten about for two years as this article shows.

The shutdown is based on the myth that the Federal Government is going to run out of money to pay its bills if it is not allowed to issue more Treasury bonds to match its deficit spending.

That is 100% false, and the reasons were covered in this recent article around the time of the last mini shutdown and last-minute deal.

So with the charade behind us what does the decision mean for investment markets?

1. Sentiment dips associated with a lack of confidence in the government due to government shutdowns and bankruptcy are postponed for two years into 2019 which is good news.

2. $300B of additional state money will now be injected into the economy.

These are two very positive outcomes.

The additional $300B of income to the private sector will allow financial assets such as stock bonds and real estate to rise further. This builds on the additional $1 trillion to be left in the economy, over ten years, by not being taxed out thanks to the recent tax reforms. The impact of the tax reforms on the economy was discussed at the macro level in this article recently.

A summary of the macro-fiscal flow impact of the tax changes plus this additional shutdown measure is shown in the table below as a percentage of GDP.

All figures are shown as a percentage of 2016 GDP

Private Sector Credit Creation

[P]

External Sector

[X]

Government Sector

[G]

TOTAL

[P]+[X]+[G]

2016

0.5%

-2.6 %

3.2%

1.1%

2017

0.1 %

-2.42%

3.5%

1.18%

2018 with tax reform

0.1%*

-2.4%*

4.13%*

1.83%*

2018 with tax reform plus shutdown agreement

0.1%*

-2.4%*

4.29%*

2%*

(Source: Trading Economics, FRED and Author calculations based on same)

*estimated.

Rising macro-fiscal flow is always good and portends for better things to come.

Conclusion Recommendation and Summary

The "national debt" is the result of how the Fed hits its target rate and a law that requires Congress match deficit spending with bond sales.

Change these two things and Treasuries would reduce very quickly and no one would need to buy it.

The currency issuer is only limited by the number of real resources to buy beyond which there is an inflation barrier.

The above two principles apply to other currency issuing countries as well and is an outdated practice dating back to the dark gold standard days that ended in 1971. Letting go of this outdated practice is part of the "Copernicus moment" in economics and public policy that needs to happen to herald in a new golden age.

We should dispense with Treasuries "national debt" not because they are a functional problem but because they are used in political scaremongering and lead to sub-optimal economic management based on false assumptions.

The positive thing this last "shutdown" charade has brought is two years grace where there will be no more confidence shaking shutdowns and also an additional $300B of government spending to add to the recent tax cut reforms. This will add a full 2% to GDP and cause investment markets to rise and increase the value of stocks, bonds, and real estate. One can benefit from this general rise in the private sector with exposure to the following ETFs:

  • Guggenheim S&P 500 Equal Weight ETF (RSP)

  • iShares Global 100 ETF (IOO) tracks the S&P Global 100

  • iShares Core S&P 500 ETF (IVV) tracks the S&P 500

  • SPDR S&P 500 Trust ETF (SPY) tracks the S&P 500

  • Vanguard S&P 500 ETF (VOO)

  • iShares Russell 2000 ETF (IWM) tracks the Russell 2000

  • iShares S&P 100 ETF (OEF) tracks the S&P 100

  • Guggenheim S&P 500 Pure Growth ETF (RPG)

  • Guggenheim S&P 500 Pure Value ETF (RPV)

  • SPDR Dividend ETF (SDY)

You might also wish to ask your Congressional representative why they go along with this myth and if they believe the myth. Then vote for a more competent candidate at the next election if you discover your Congress representative believes in myths that damage the country.

Disclosure: I am/we are long UDOW.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.