No one knows how long the government shutdown will last, but how long investors think it might last could have a real economic effect by itself. Although perhaps not in the way you might imagine. First, the numbers: Morgan Stanley’s Chief US Economist Vincent Reinhart appeared on Bloomberg and revealed a disconcerting pie chart that showed 47% of investors think the shutdown will last more than a week. Only one percent predicted it would last one day, with 17 percent predicting two to three days, and 36 percent saying four to seven days.
Government Shutdown Length Prediction and Investor Behavior
“So there’s two parts to it: the first is, the length of the shutdown is self-fulfilling,” says Reinhart. “Speaker Boehner will relent when enough constituents pressure builds. The biggest source of constituent pressure is an adverse market reaction. “But if market participants are thinking the shutdown will be a long time, the pressure mounts only more slowly, and it turns out to be a long time. What does it mean? A bigger drag on growth, a bigger gap in the data, a longer time before we know the next Fed Chair, and, most ominously, it begins to move into the debt ceiling window. And it’s the debt ceiling that investors need to be worried about.” Luckily, the looming debt ceiling will force the issue.
Government Won’t Default
Reinhart says the government will not default on its debt. In fact, he puts the chance of that happening at zero. “The day the secretary is constrained by the debt ceiling, and would otherwise overdraft the account of the Fed, one of three things has to give: you either have to break the Second Liberty Bond Act of 1917, that establishes the debt ceiling; the Federal Reserve act, because that says you can’t lend directly to the Treasury; or the 14th Amendment of the Constitution, that says lawfully issued debts should not be questioned,” Reinhart explains. “The secretary goes into a building that has an Alexander Hamilton statue out in the back, do you think he wants to be the first secretary to default?” (Photo Credit: http://www.flickr.com/photos/kazvorpal/)
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