Transcript of Radio Interview: October 4, 2013
How Will the US Government Shutdown Impact Markets?
As the government shutdown, the stock market largely shrugged. Yesterday the Dow Jones actually rose 62 points suggesting investors don’t see the current shutdown as a long-term problem. Here with more analysis is Jack Rasmus. He’s a Political economist as well as the author of “Obama’s Economy: Recovery for the Few”
Rob Sachs, Host of Russia Radio American Edition:
‘This shutdown occurs and the stock market actually gains a little bit. It doesn’t seem to be congruent with the thoughts of what stock market would do. Why did they gain?’
Dr. Jack Rasmus:
The stock markets are more concerned with what is happening with the Fed taper of its QE and on September 17th the Fed made it very clear it was going to continue pumping 85 billion a month into the economy. That is their first and foremost major concern. Second, the markets are concerned about real data on economies in the US, Chinese, Eurozone economies, jobs, retail, sales; and what is happening with banks in Eurozone, Italy, China, manufacturing exports, emerging markets etc. Third in line of concern at the moment, I would say would be the debt ceiling situation . But that is still several weeks off, plenty of time to deal with that.
In contrast, the government shutdown really doesn’t affect markets that much, which is not surprising. The last time we had a government shutdown in 1995-1996, stocks and bond markets were totally unaffected by it and were hardly impact at all by the crisis. So it is not strange that we see the same development going on here today.
Now the real risk is if the shutdown continues for whatever reasons, which I don’t think it will, for another 2-3 weeks, and then it converges with the debt ceiling deadline. That deadline for the debt ceiling is probably closer to the end of October than the October 17th date, the Obama administration is now saying. Then you have a different scenario in terms of impact on financial markets and the US economy.
‘We came to that before when we had this debt ceiling debate and people were saying this would be Armageddon, it is outrageous – the idea that the US would not pay its debts. But what was the role of Wall Street before in preventing that from happening? What can Wall Street do now to urge congressmen and those on Capitol Hill to come to some type of agreement?’
Dr. Jack Rasmus:
I am sure Wall St. and its lobbyists are putting increasing pressure already on politicians to come to some kind of agreement. Last time we had a debt ceiling confrontation, in August 2011, they waited till the last minute and didn’t leave themselves enough time to really lobby. But now I am sure there is a lot of intense lobbying going on at this particular stage before the October 24th or so ceiling deadline, when the government may not make an interest payment on its debt, which creates a default. That’s when a technical default happens.
I think an indicator of how things may be going as we approach that deadline will be what starts to happen with short-term interest rates. If you see the bank-to-bank federal funds rate, short term Treasury bills, or especially the bank repo market began to rise, then those rising rates will have an impact on stocks and bonds. That’s what investors are concerned about. That’s what will cost them money—not the government shutdown that impacts mostly workers and households. But I don’t see that happening at this stage. Not yet.
‘When you look though at what is at stake, a lot of people say the shutdown is not so much a big deal but what really gets people nervous when we talk about inaction on Capitol Hill? Is it something more than just not getting a legislation passed?’
Dr. Jack Rasmus:
What makes the markets (i.e. banks and investors) nervous is they can’t necessarily count on getting paid their interest at the time it comes due should a default occur. If you don’t get paid for your investments, then you are not going to make investments. When interest rates rise in anticipation of, or a result of, a default by the government, that reduces the demand for government bonds that spills over and so forth and causes problems with rising interest rates in general. It is the translation of all this into rising rates that is important in terms of impact.
That is the key and we already see that the US economy is becoming increasingly sensitive to increases in rates, bond rates and so forth. We saw that over this past summer with the Fed trying to taper its QE buying, and how long-term interest rates immediately shut up over 1% and caused serious problems in the US and global economy. With emerging markets capital flight and so forth and the slowing of the housing market in the US. So, the global system is extremely sensitive right now to interest rate hikes after 5 years of QE. Not just long-term rates but as we will see with the debt ceiling issue, also with short-term rates if it comes to a crisis. It could all have a significant impact and more quickly than people think right now.
‘Your book “Obama’s Economy: Recovery for the Few” talks about a lot of the benefits that we’ve seen have not been spread out and when we think about this economic recovery we’ve had, it has really not been felt in the middle class. Is that something where if we default, it is going to be impact on the middle class the most, or is this something where the stock market, these kinds of things are for investors to worry about and those who are throwing around tens of millions of dollars each day?’
Dr. Jack Rasmus:
It will primarily affect stock and bond markets and the investor class in a very short term that has a little effect on the real economy and real folks. But what could happened over time is that when investors pull back, then you have business investment pulling back, which is not that great in the US right now anyway. That starts to affect jobs, which are not really rising much at the moment, and incomes for the middle class and so forth, which are already falling in the US. For most US household we already have real disposable income declining at 1 and 1.5% per year for the last 4 years. And as recent data shows, the wealthiest 1% have accrued 95% of all the additional income gains since 2009. So, we are already growing increasingly income lopsided and consumers have a hard time spending, as we are now seeing with retail sales struggling in the US. So, this debt ceiling thing can have a important psychological impact. It can have a psychological impact on consumers and consumer spending and on businesses and business spending, and that is how it will mostly transmit into the real economy. The psychological impact is really important.