The Republic of Crazy

The economic extremists in the US Congress are hijacking the smooth functioning of government and their actions are threatening to upset what had been a solid pace of economic expansion after the turmoil and near depression with the financial and banking crisis of 2008 to 2011.

With the federal government in the US closing down and the debate over the debt ceiling likely to hot up over the next few weeks, the Republican Party will be the main culprits if there is any downside to the economy while ever this policy vandalism continues.

Politics becomes very sad when one side would prefer to trash the economy and financial markets for the sake of political gain. It is the worst kind of behaviour as it has significant effects on people’s wellbeing. Thousands of government employees don’t get paid, they don’t spend their money in the shops and elsewhere and as a result, firms’ profits are eroded.

Quoted in Bloomberg, consulting firm IHS Inc. estimates that the initial effect of the shutdown is at least $US300 million ($321.9 million) a day, but that figure will increase at an accelerating rate if confidence and spending is further depressed. According to IHS, a week-long shutdown would clip 0.2 percentage points (annualised) from fourth quarter GDP growth. Anything longer than that will obviously have a far greater negative effect on the economy.

It is no wonder the US stock market has fallen in the wake of the government shutdown, notwithstanding the 0.4 per cent lift in share prices overnight. Over the previous 10 days, stocks had fallen 3.5 per cent as the budget shenanigans loomed large.

Presumably, one of the main objectives of the Republicans is to make the Obama administration look as bad as possible as economic confidence fades and markets weaken. The mid-term elections are a little over a year away.

Until the last few years and certainly since Obama has been president, the budget and debt ceiling legislation issues were generally basic operational matters of government, with limited political posturing. There have been several instances in the past where Congress has delayed the passage of the budget with little lasting negative effect. Markets are no doubt hoping for the same in the current instance.

Nonetheless, the largely procedural issues of the budget and debt ceiling are being politicised to the point where slabs of the economy are closing down, confidence is no doubt going to be damaged and there are a range of unintended consequences that could unfold if the US government defaults on its debt.

When the economic extremists threatened to block the legislation to raise the debt ceiling, Standard & Poor’s credit rating agency downgraded the US on the heightened risk that bond holders would not be repaid.

There is a real risk that this occurs in the weeks ahead, if the extremists continue to hijack policy.

The current $US16.7 trillion debt ceiling needs to be raised in the middle of this month as the budget deficit and maturing debt needs to be financed. According the Congressional Budget Office, unless the debt ceiling is raised and Treasury is allowed to borrow, the US government will run out of money between 22 and 31 October.

Until the budget and debt ceiling legislation are passed, markets are likely to remain fickle and of course, the Federal Reserve will not be doing anything on tapering the quantitative easing for fear of adding to market and economic risks.

The economic extremists might yet succeed if they fail to step up and allow the government to function. Economic activity from the government may fall even more rapidly than it is already projected to, the government debt may not increase, they may dismember the Affordable Care Act – ‘Obamacare’ – from functioning. It seems these are their objectives with the current round of posturing.

The consequences of such action would undoubtedly be a return to recession, a sharp rise in unemployment and dislocation for financial markets.

This seems a very high price to pay to meet some misplaced fanatical ideology.