Government Shutdown Imminent, Rates Spike, Stocks Collapse

Back here at home, time is running out to avoid a government shutdown. Billions of Americans could go without paychecks, including members of the military. The country is headed for a shutdown, and everyone should prepare as such.

Big guys, it's Graham here, and let's get right to the point. In three more days, we could be facing a government shutdown. That's right, if a looming financial vortex and 500 monthly Tinder memberships aren't bad enough, we're about to come head to head with some potentially serious ramifications for the entire economy if something isn't done fast. As it stands right now, it's not looking good.

Because of that, we should discuss exactly why we could see a government shutdown on October 1st, what this means, whether or not this is something to actually worry about, and then most importantly, what this means for you. Because I have to say, there's a lot of information out there that's being left out that you deserve to know about, and hopefully, this will give you the entire picture on what's actually going on.

Although before we start, as usual, if you appreciate these kinds of videos where I just talk about the facts without picking sides, it would mean a lot to me if you hit the like button or subscribe. That's all I ask, and in return for doing that, I will do my best to respond to as many comments as I can. So thank you guys so much, and also big thank you to Kittle for sponsoring today's video, but more on that later.

Alright, so first, let's answer the big question you're probably wondering: What is a government shutdown, and how will this directly affect me? And by me, I don't actually mean me literally in this; I mean you figuratively. It's you.

Anyway, all of this starts with something you probably heard a lot about this year, and that would be the debt ceiling. Simply put, this is the maximum amount of money that the United States is able to borrow to pay for all of its obligations, like Social Security, Medicare benefits, military salaries, interest on the national debt, tax refunds, and a multitude of other services that a country needs to maintain. Like when you see a 33 trillion dollar national debt, that's not there by accident. Lawmakers intentionally approve an overall budget that the United States is able to spend.

Although even though we got dangerously close to defaulting on that debt earlier in the year, we're back up against the wall again with another snag, and that would be the 2024 budget. See, even though Congress previously agreed to raise the total debt ceiling until 2025, how they actually allocate that money is a different story entirely. Usually, in typical situations, these budgets are approved at the end of the fiscal year on September 30th. That would then allocate the following year's budget, and if they don't agree to that, then we'll have what's called a government shutdown.

Now, even though it sounds absolutely ridiculous that a government could quite literally shut down because members of Congress can't agree amongst themselves, under the Anti-Deficiency Act of 1884, federal agencies cannot spend or obligate any money without appropriation from Congress. Therefore, if there's no bipartisan agreement made in the next three days, federal agencies must have to immediately cease all non-essential activity. Basically, the United States is not allowed to spend money that Congress doesn't authorize, and right now Congress is not able to come to an agreement in terms of where that money should go.

As a result, a worst-case scenario would mean that all non-essential government activity would be put on hold, including a big one, and that would be the collection, processing, and examination of government data, including employment and inflation figures, which the FED needs to be able to make its rate hike decision on November 1st.

So before we talk about the impact this is likely to have on you, your money, and the economy, we should talk about why this is happening in the first place. Because I have a feeling it's probably not for the reasons you expect. Like I mentioned earlier, government spending works on an annual basis with laws that get passed that dictate how future money is spent. But when there's a stalemate between parties, that's where things get interesting.

See, in a normal scenario, if politicians operated efficiently, a budget would pass through the House of Representatives, get approved by the Senate, and then be sent off to the president to sign and go into effect. Although in 2023, there's an issue. The House of Representatives is led by Republicans; the Senate is majority Democrat, and for a bill to pass, everybody is going to have to come to an agreement for something to pass. This means somewhere along the way, someone has to compromise.

Now, to further complicate the matters, the Republicans within the House of Representatives are also divided, with several members who feel very strongly that the upcoming budget should also include spending cuts. Now, even though I generally stay out of politics for those who are curious about what exactly the disagreement is about, it appears as though Kevin McCarthy, the House Majority Leader, has made promises to the right, ultra-right, and moderates in order to keep his job and stay in power.

Although as you would probably imagine, it would be impossible to satisfy all of those demands without upsetting some people and splitting the group in half. So his choice is really as follows: He could try to push spending cuts that would be dead on arrival to the Senate, thereby causing a government shutdown, or he could give in to the majority to keep the money flowing and then risk his job.

So as we're all about to see very publicly, something has to give or, I guess in other words, Republicans first have to compromise amongst themselves to then compromise again to the Senate. If that's not done in three days by September 30th, well where do I even start in terms of the most immediate impact? The White House issued a statement saying that after duty military and federal law enforcement personnel would be forced to work without pay until funds are appropriated. FEMA's disaster relief funds could be depleted, and everything else from TSA to the FDA to almost every other federally funded agency could be affected.

Goldman Sachs analysts also estimated that every week the federal government is shut down subtracts about 0.2 percentage points from the gross domestic product. The other concern is that a government shutdown would delay official statistics, like these September jobs report or Consumer Price Index, which the Federal Reserve uses to determine whether or not they're going to raise rates, which right now is just four more weeks away.

Fortunately, though, according to Barron's, a government shutdown would likely have to last at least three to four weeks for the collection of data and dissemination to be impacted to a degree that would leave the FED flying blind ahead of its November meeting. Although what I personally found the most surprising is how a government shutdown impacts the stock market. Because I'll be honest, it's probably completely different from what you're expecting.

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Alright, now in terms of how a government shutdown would affect the stock market and your investments, the truth is it's completely mixed. For example, the worst government shutdown occurred in the 1970s, with stocks down almost four percent. But in late 2018, when the government was shut down for over a month, the markets rallied over 13%. So from that perspective, it really seems as though it doesn't really matter that much. In fact, according to Barron's, defense firms, some health care companies, and other government contractors are the most directly affected, but for the broader market, the direction of corporate earnings, interest rates, and other macro factors are more consequential.

On top of that, they also go on to say that government shutdowns are a lot more common than you would expect. For example, there have been 20 federal government shutdowns since 1976, with the longest dragging out for 34 days from 2018 to 19. The average has lasted for only eight days. They also go on to point out that during those shutdowns since 1976, the S&P 500 has been higher during 10 of those shutdowns and lower during the other 10. So its average return is exactly zero.

Because of that, the real issue to me would be that a government shutdown leads to a loss in confidence throughout the economy. It signals that we don't have unity within the United States and on a deeper level, the real impact is felt throughout government and federal employees who will have to either work without pay or go through a furlough until eventually things resume back to normal.

But by and large, as scary as it is to hear about something like the government shutdown, in reality, most of it comes down to a political game of chicken to see who blinks first to try to pass various spending agendas. Then, at the very last moment, right before something permanently breaks, they magically come to an agreement in the last possible second. This means that everything we're seeing today is most likely just political theater. Unless you work for a federal agency, you probably have nothing to worry about besides just seeing a whole bunch of scary headlines on Reddit and CNBC.

Although keep in mind, we're still not out of the woods quite yet. There is one other aspect that very few people are talking about, and that would be the impact of the United States credit rating. Look, for those unaware, since the United States largely functions and operates off borrowed money, they're issued a credit rating that demonstrates how likely they are to repay back their loans. In fact, every single country has a rating like this.

For the longest time, the United States was considered to be the safest because not only are they the world's reserve currency, but they also have a perfect track record of always paying back their debts in full on time as agreed without any drama. However, on August 1st, the credit agency Fitch downgraded the US in terms of its future outlook, going from what's called the AAA rating to a double A Plus. Once that happened, the stock market began immediately selling off. Why? Well, not only was this the second time to have ever happened before in history, but if the US is considered to be a risk, then they must pay higher interest rates to entice investors, which means more money going out and less money coming in.

As they say, this reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance compared with other countries with similar debt ratings. To be honest, they're not quite wrong. Earlier in the year, the United States was within days of a government default. Our national debt is over 33 trillion dollars and climbing; interest on the national debt is only growing larger now that interest rates are at 20-year highs, and it seems as though there's too much of a political divide to come to a reasonable solution.

You know, even though the United States has never defaulted on its debt and realistically never will, in 2011 they did get so close. The S&P was downgraded from AAA to double A Plus, and several other agencies issued a negative outlook as the debt crisis continued to get worse. Following that announcement, all three stock indexes immediately fell between five to seven percent in a single day, and it took almost a year to recover.

However, the larger issue today isn't so much of whether or not the United States is going to default on its debt, but instead eroding investor confidence. As Moody's pointed out, while government service payments would not be impacted, a short-lived shutdown would be unlikely to disrupt the economy. It would underscore the weakness of U.S. institutional and governance strength relative to other AAA-rated sovereigns that we have highlighted in recent years. This is especially significant because Moody's is the only one of the major three credit agencies not to downgrade the US from AAA to double A Plus.

If they're making such public statements about this now, there's a chance that all of this political division could only make our credit situation worse. After all, they then go on to say that looking ahead, weaker fiscal policymaking that leads to persistently high fiscal deficits and higher than expected interest costs would put pressure on the U.S. rating or outlook, almost implying that it's a matter of time until it eventually happens.

In terms of my own thoughts and what's going to realistically happen, my belief is that in the last possible minute, right before a shutdown would occur, they will magically come to an agreement to fund the government using an emergency bill for the next four to six weeks, giving them more time to argue back and forth. Personally, I believe this to be the best possible case scenario since realistically, we're not getting a full bill approved by October 1st.

A shutdown benefits nobody, and an eye for an eye is not a good negotiating strategy if you're trying to get a point across. However, all of this really comes at the expense of investor confidence within the United States, and I think we could all agree that stalling like this is doing more harm than good for everyone else.

Though this is precisely why it's always a good idea to keep an emergency fund on the side, live below your means, try to save as much money as possible, and work a side job for extra income. After all, you have no direct control over what the government decides to do with your dime, so you may as well take matters into your own hands. Put yourself first and subscribe so that that way I'll keep you updated on exactly what will happen.

So with that said, you guys, thank you so much for watching. As always, feel free to add me on Snapchat and Instagram. Thank you again to Kittle for sponsoring today's video; the link is down below in the description. Thank you guys so much, and until now.