The Impact of The Government Shut Down On the Economy – Podcast 10.4.13

The Impact of a Government Shut Down on the Economy

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Summary of Podcast

Ryan reviews all the reasons that quantitative easing (QE) is still in place. Louis notes that he and Ryan had mentioned last week that the Fed might use a government shut down to as an excuse to keep QE going. Louis notes that after the Fed’s September meeting a few Fed board members indicated that QE might be tapered in October depending on the data. Louis notes that the Fed won’t have the data they need due to the government shut down so they will probably keep QE in place in October.

Defaulting Would Be The Last Straw

Louis notes that the U.S. has dysfunction monetary and fiscal policy. Louis notes that the U.S. can and should avoid default by ensuring they pay the debt. Louis notes that a default would cause a loss of confidence in the U.S. dollar.

Louis notes the investors can ignore the flaws in U.S. monetary and fiscal policy but they can’t ignore not getting paid.

Ryan notes that the politicians don’t seem to care what damage their inaction causes the economy.

The Recovery is Over

Louis notes that the recovery is over and that the government shut down seals the recovery’s fate. As such the Fed will have more reason to continue its QE or QE style monetary policy. Louis notes that the average person is not well versed in economic affairs and that a Reuters poll showed that only one in five Americans knew what QE was.

Ryan notes that government’s process is antithetical to any rational business process with accountability. Louis notes that the reason the world has confidence in US. debt and the dollar and gets away with bad fiscal and monetary policy is because it is the dominant military and economic power. Louis notes that the US over the past 40-50 years has spent more effort in redistributing its massive wealth and showing off its military than maintaining its productive capacity.

Ryan and Louis discuss Ron Paul and his new TV channel which Louis characterizes as a fan club. Ryan notes that mortgages can not be processed because of the government shut down. Ryan discusses the challenges the shut down presents to the housing market.

Louis discusses the Fed Presidents remarks about tapering QE being data dependent, perhaps knowing there wasn’t going to be any data due to the government shut down. Louis also notes that the costs and adverse economic impact of Obamacare could be used as an excuse for the Fed to do more QE.

Louis notes that the Affordable Heath Care Act (AHCA)is now called Obamacare but that it wasn’t always that way. Louis jokes that only Republicans used to call the AHCA “ObamaCare” but now Obama himself and Democrats call it that too as they can’t say with a straight face that the act is “affordable”.

Former Speaker of the House Nancy Pelosi: “We have to pass the bill to find out what is in it.”

Louis and Ryan note the prevalence of people with deeply held beliefs based on shallow understanding. Louis notes that politicians often do things that they never campaigned to do or that the people ever wanted them to do and notes that most elected officials gain office with a relatively small percentage of their districts’ overall population.

Impact of the Government Shut Down on the Real Estate Market

Ryan notes that a lot of the economy and the real estate market is harmed by a government shut down and that the Founding Fathers never intended the government to be as involved in the private sector as it is. Louis adds that the free market doesn’t shut down or have a single point of failure.

Ryan notes that the government will not default. Louis agrees and adds that politicians will use the threat of default to get what they want. Louis notes that while a default won’t happen in October, because the U.S. can pay interest on the debt based on tax receipts, at some point due to rising debt and rising interest rates they may not be able to. Ryan notes that is when the Fed comes to the rescue once again!

Louis notes that seven years of QE is far beyond what Keynes would have advised (temporary stimulus when the economy is in recession/none when the economy is in surplus) and also notes that not only has the Fed printed money in the trillions for years, it hasn’t worked!

Ryan notes that politicians don’t understand business. Louis notes that politicians understand that they can promise benefits to get elected or reelected.

Wealth Disparity

Ryan and Louis discuss wealth disparities. Louis notes that its not capitalism that has caused the disparity, but rather in part Fed policies that favor the wealthy. Louis notes that those receiving special governmental favors are not in the words of the President “playing by the same rules.” Louis notes that there is welfare for the ultra wealthy and ultra poor.

Louis notes that most families have two wage earners and that masks the economic decline as the living standards are lower even though two people are working vs. just one 40-50 years ago. Louis and Ryan discuss how a shut down in the government slows the momentum of the real estate market that will be hard to recover.

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Effect of the Government Shut Down and Threat of Default on Gold and Silver

Louis and Ryan discuss the price movements of gold and silver in light of the government shut down. Louis notes the differences in the paper and physical gold and silver markets and discusses naked short selling in the paper markets.

Louis notes that Obama can preserve his legacy. He came into office inheriting a bad economy, so he could blame the prior administration, he can avoid a second financial crisis before his term ends, then after he leave office and if a Republican takes office and the economy collapses, he can blame his successor!

Louis notes that Greenspan was criticized for low interest rates, Bernanke for NO interest rates. What’s next? Yellen and negative interest rates?

Saving the Banks!

Louis and Ryan discuss bail ins as occurred in Cyprus where the banks confiscated a percentage of depositors savings.
Louis notes that we have been conditioned to believe that banks are essential to our existence and therefore if we have to lose some of our deposits to keep them going we would accept it as a small price to pay for staying alive!

Louis predicts that the shut down will last right up till the 17th of October at which point there won’t be a government shut down and Wall Street will cheer that result. Louis predicts that more government employee layoffs will be part of a budget deal. Louis notes that the politicians will pat themselves on the back saying they avoided disaster. Louis notes that its not an achievement to be able to claim “it could have been worse”.

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