There has long been a quasi-magical belief in the U.S. that capitalism's intrinsic dynamic of creative destruction will always create more jobs than it destroys. The evidence is compelling that this belief is no longer reality-based. The U.S. has reached Peak Jobs - at least the sort that can support a household.
The BPC, whose initial analysis of the US default has become the staple "go-to" analysis for Treasury cash obligations and key events in the day surrounding and following the X-Date, has released a new update on when the US runs out of money. The latest: October 22 - November 1. Which means that if it so desires, the GOP can and probably will delay a debt ceiling bargain until the last possible moment which may well be, appropriately enough, Halloween. In the meantime, the US Treasury now has about $40 billion in total cash on hand and available extraordinary measures and declining fast.
David Stockman, author of The Great Deformation, summarizes the last quarter century thus: What has been growing is the wealth of the rich, the remit of the state, the girth of Wall Street, the debt burden of the people, the prosperity of the beltway and the sway of the three great branches of government - that is, the warfare state, the welfare state and the central bank...
What is flailing is the vast expanse of the Main Street economy where the great majority have experienced stagnant living standards, rising job insecurity, failure to accumulate material savings, rapidly approach old age and the certainty of a Hobbesian future where, inexorably, taxes will rise and social benefits will be cut...
He calls this condition "Sundown in America".
In a country in which the aging population wants their (10,000 kcal) cake, and the diabetes treatment for free too, the chart below is what happens.
There really is very little reason why this "government shutdown" cannot continue indefinitely because almost everything is still running. 63 percent of all federal workers are still working, and 85 percent of all government activities are still being funded during this "shutdown". It turns out that the definition of "essential personnel" has expanded so much over the years that almost everyone is considered "essential" at this point. In fact, this shutdown is such a non-event that even referring to it as a "partial government shutdown" would really be overstating what is actually happening. In the end, this shutdown could turn out to be very good for America. We have a government that is wildly out of control and that desperately needs to be reigned in.
Would Obama push his pals off a cliff to get a deal?
If there is one day the Fed's trading desk actually did want futures lower, if only for purely optical purposes and to at least suggest that the government, and not the Fed, is still in charge of the US, it is the day when the US government - for the first time in 17 years - has shut down. They certainly did not want the S&P to be up nearly 0.5% mere hours after Congress and the presidency confirmed to the world that in a world in which "the Chairman gets to work", a functioning government is completely irrelevant. Yet this is precisely what is going on. What is making matters worse is that on the other side of the world, Japan also finally announced the well-telegraphed sales tax increase to8%, offset by a JPY5 trillion yen "stimulus" which however Japan said, much to the Chagrin of Mrs. Watanabe and a 100 pip overnight plunge in the USDJPY, would be funded not with more new bond issuance (and thus without new "wealth effect" generating monetization). It is unclear just how it will be funded but since increasingly more global fiscal and monetary policy is based on science fiction we know better than to ask.
Even though there is no technical link between the two main fiscal issues – the continuing resolution (CR) and the debt ceiling bill - there is a link in the minds of market participants because prompt resolution of the CR could spell a favorable outcome for the debt limit. On the other hand, a government shutdown tonight could lead the market to be more pessimistic on the chances of a debt default. As BofAML notes, the link between the two issues is fairly complex but the shutdown battle is just the beginning - and, as the suspect "the fight could get ugly."
There is a considerable amount of debate in alternative economic circles as to whether a federal government shutdown would be a “good thing” or a “bad thing”. Sadly, a government shutdown is sizable threat to the American financial system, and few people seem to get it. Perhaps because the expectation is that any shutdown would only be a short term concern. And, this assumption might be correct. But, if a shutdown takes place, and, if “gridlock” continues for an extended period of time, We have little doubt that the U.S economy will experience renewed crisis. Here's why...
BofA's breakdown: "The shutdown will likely add to the budget deficit. It is costly to stop and start programs. The 1995-96 shutdown directly added $1.4 bn to the deficit (about $2.5 bn in today’s dollars) Moreover, the shock to growth will undercut tax revenues. In addition, ironically it does not impact the implementation of Obamacare since it is an entitlement similar to Medicare. However, there is some chance it could delay US economic data releases: in 1996, the December employment report was delayed two weeks as a result of the shutdown then. The Federal Reserve and the Post Office, both of which do not depend on Congressional appropriations, will not see any cutbacks due to a shutdown."
With even the most compromising politicians on both sides of the aisle admitting at least a brief government shutdown is inevitable (and according to Stone McCarthy the shutdown will hardly be brief and will affect the timely release of such major economic indicators as construction spending, factory orders and the employment number on Friday), the next question arises: how have markets responded to not only shutdowns, but also debt ceiling impasse (with the memory of August 2011 still very vivid) in the past. Here is the full answer from Deutsche's Dominic Constam: "In a shutdown scenario, government agency-compiled economic data releases could be delayed, while essential services, such as Treasury auctions, interest and principal payments on Treasury securities will not be affected. Some federal workers could be furloughed. The most recent government shutdown occurred in late 1995 to early 1996, and lasted about three weeks. Payroll and retail sales data were delayed during that period."
With a government's October 1 shut down - temporary of course - now seemingly inevitable, and more importantly with the peak debt ceiling negotiations due in just about a week after which point the Treasury will run out of money, many wonder what comes next. That this is happening just two short years after the dramatic August 2011 debt ceiling impasse, when the market tumbled 20% and likely slowed economic growth is still fresh in everyone's mind, is hardly helping matters. Add a potential political crisis in Greece and Italy, and suddenly a whole lot of unexpected variables have to be "priced in."
Here are six things to ponder this weekend:
1. Inflation Debate Continues
2. The Obamacare Nightmare
3. The Disconnect Between "Main Street" and "Wall Street"
4. Payroll Number Become Even More Manipulated
5. Congress Living The High Life At The Taxpayers Expense
6. What If The "Fear Trade" Bubbles Up?
As the state borrows trillions of dollars to support its Aristocracy and dependents, its debt skyrockets. The political Aristocracy expects the tax donkeys will carry a heavier burden without revolting, and the 60% "tyranny of the majority" who pay little but collect enough to get by will be wary of risking their benefits by resisting the existing political-financial kleptocracy. In terms of democracy, the tax donkeys are trapped; they can't match the tens of millions in political contributions of the top .5%, and the 60% below them will support the status quo out of fear that the alternative could be even worse. Politically, the system is unbreakable. Financially, it is unsustainable.
"If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion. That's the fiscal gap," he says. "That's our true indebtedness."