The way Congress goes about its business is maddening, counter-productive, and basically, a drag on the economy.  This week we examine the partial government shutdown and its ramifications.

First, we summarize an aptly entitled article “Putting a price on political stupidity”, which concludes ‘stupidity’ already has been priced into the market. The next article examines the cost of reckless behavior by Washington.  Finally, the inimitable Mohammed El-Erian offers his perspective on the Congressional stalemate.

Putting a price on political stupidity.  “The partial shutdown of the US government passed with little or no impact on the markets that stood to be most affected, even though there was uncertainty about it to the end…so what has happened so far—the failure to agree on a budget and an initial shutdown of the US government—has evidently been priced in…the Federal Reserve’s decision to delay ‘tapering’ the stimulus it was providing to markets—itself perhaps partly influenced by concerns about the political situation in Washington—has for the time being more than counteracted concerns about deadlock…uncertainty will force the Fed to keep pouring out the QE stimulus…so far it is not a big deal.” Financial Times (tiered registration required)

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The cost of a showdown.   “The cost of a shutdown is minor compared to the potential harm from a debt-ceiling fiasco.  If a failure to raise the debt ceiling led the government to miss debt payments the financial impact would be uncertain but probably enormous.”  The last time Washington played this game was in the summer of 2011.  “Between late July and middle of August equities dropped nearly 15%…financial markets are not the economy, but these price swings do capture shifts in sentiment that are reflected to some extent in actual firm and household decisions, with consequences for the real economy.  We have to hope that a deal is struck to raise the debt ceiling once again.  But the costs of this reckless behavior will begin to mount well before October 17.”

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El-Erian:  Congressional Drama is High, but Markets are Comforted by 2 Specific Beliefs.  “Markets are comforted by two specific beliefs:  if there is a government shutdown, it is unlikely to last for more than a very few days at most; and if the mid-October debt ceiling date is reached, Treasury will find a way to buy more time for lawmakers to get their act together….as dysfunctional as Congress has become, lawmakers are unlikely to seriously derail the economy.  Accordingly, when it comes to positioning portfolios, markets are right in treating the current rhetoric as ‘noise’ rather than ‘signals’…neither markets—nor, more importantly, the economy as a whole—should expect Congress to pivot any time soon from manufacturing headwinds to providing helpful tailwinds.  And that is really unfortunate.”

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And in case you missed it, click here to read last week’s blog post which focuses on the Fed tapering its asset purchases.

We hope you enjoy reading these articles along with us and that you find them informative.  Please forward this to your friends and family.


J. Mark Nickell & Co.


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