Investment Insights & News

Government Shutdown

Ron Gambassi
October 15, 2013

Constitutional Crisis or Political Gamesmanship?

The Congress seems compelled to take this game of chicken right down to the wire.  An 11th hour agreement, even if only resulting in a temporary delay, will allow many members of Congress to discreetly wipe the egg off their faces.  Neither side can acquiesce now. After all, there’s still a whole day before disaster strikes.

I’ll leave the T.V. networks and newspapers to make the case of whether the Republicans or the Democrats bare 51% of the responsibility (or maybe 80%) for driving the country to this economic pain point.

The problem is, we’ve already thrown the proverbial “baby out with the bathwater”.  The U.S. has become the laughing stock of the world.  America has been the world’s one true economic super-power for a hundred years. Antics like risking a government default jeopardize the likelihood of maintaining that position into the distant future.

If an actual default occurs, the damage to the U.S. reputation would take a long time to repair, if it were repairable at all. The rest of the world (with few exceptions) looks to the U.S. as the fortress of economic strength and stability. The threat of default is making foreign governments question our position as that fortress to the world. An actual default might be the tipping point that leads the rest of the world away from the purveyor of “full faith and credit” to the world.

Imagine a conversation with Treasury Secretary Jack Lew if the country defaults on its debts come this Friday. “Mr. Secretary, what’s the priority for paying the bills of the country? Will it be paying interest on Treasury Bonds or paying Social Security recipients? The Chinese won’t be happy to miss an interest payment, you know. But wait, the Chinese are only the second largest owner of U.S. Treasury debt. The largest owner is the Social Security Trust fund. Can we hold-off paying U.S. service member salaries for a while”?

I haven’t heard a single person in the news say they think the U.S. will default. That’s why the stock market has virtually shrugged off the risk of default. The “smart-money” says this is all political gamesmanship. If the smart money is right, the economic damage to the U.S. will be contained but the damage to U.S. credibility has already begun.

If the country defaults and misses important payments, the short and long term results will be unthinkable. Are we a government “of the people, by the people and for the people”, or are we a government, “of the Republicans, of the Democrats, and of the Tea Party?"

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