The Shutdown/Default Scare-athon

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The Shutdown/Default Scareathon

As I write this we are two weeks into the government “shutdown” and three days away from “defaulting”. As a result all the Chicken Littles have been scurrying around proclaiming the end of the world and screaming that we need more government to fix things. It has also been a wonderful opportunity for Team Red and Team Blue to blame each other for all of our problems (they’re both right in that regard) while fertilizing the field of public opinion with a bunch of BS.

The Government Shutdown

First of all, there’s no shutdown. Yes National Parks are closed and there has been a delay in sending out some government checks, but most estimates point out that 80%-84% of the government is still operating. Don’t worry, the NSA Spy on Americans Program, the Flying Robot Murder Program, and the President’s golf course at Andrews Air Force Base are all still operating at 100% capacity. It’s really more of a government hissy fit than a shutdown.

But that hasn’t stopped politicians from decrying the economic calamity the shutdown is causing. How does the shutdown cause economic calamity? By not spending as much money, according to Obama, Reid, and Boehner (the Three Stooges), money is lost from the economy. Huh? Where do they think that money comes from? For every $1 the government spends $0.67 is taken directly from you via taxes and fees. Another $0.28 comes indirectly from you or foreign investors via US debt. That leaves only $0.05 coming from the government via the Federal Reserve’s Magic Money Tree. In other words, when the government spends $1, it first has to take $0.95 from somebody and then add $0.05 worth of inflation. If the government doesn’t spend that dollar then you get to keep your $0.95 and we don’t get any artificial inflation. NO money is lost from the economy. I won’t call the Three Stooges liars, but they are definitely economic ignoramuses.

But what if I don’t know what I’m talking about? Could the lack of government spending hurt the economy? This isn’t the first time the government has shut down, what happened before? Since 1981 (before that year the government didn’t actually shut down when a “shutdown” occurred) there have been 10 shutdowns, but only 4 lasted longer than 2 days, so I’ll look at those 4. Two of the long ones happened in November and December of 1995. I’ll discuss those as if they were 1 long shutdown. The shutdowns in 1984 and 1990 both lasted five days and GDP (the amount of money the US economy earns) growth did slow down. Aha! So the economy did get worse because of the shutdowns. Well, no. In both instances the economy had been decelerating for 6 months to a year before the shutdown occurred – it was already getting worse. But it must have really sucked in 1995 when the government shutdown for almost a month? Nope. Growth actually began accelerating then, after falling for the previous year. You could argue that the shutdown actually improved things. History doesn’t provide any evidence that a government shutdown hurts the economy. But I guarantee that won’t stop the talking heads from blaming our current worsening economy – growth has been slowing for the last year – on the “radical right wing Republican obstructionists”.

Default

Most Americans have already figured out that the shutdown is really nothing more than a biggest dick contest, so the administration has trotted out its next bogeyman, a government debt default.

US Treasury Secretary Jack Lew testifying before Congress on October 9th about the US debt ceiling: “It is irresponsible and reckless to insist that we experience a forced default to learn how bad it is.” He’s right, defaulting on the US debt would be awful. He also knows that there is absolutely no chance that this will happen if the debt ceiling isn’t raised. Jack Lew cannot claim economic ignorance. He is lying and he knows it. The administration is sticking to the principle expounded by Joseph Goebbels, “when one lies, one should lie big, and stick to it.”

How do I know he’s lying? I can do simple arithmetic. A “default” is defined as being unable to pay your contractually obligated debts. In the case of the US government, that means interest and principle on US Treasury debt. Interest comes to $220 billion per year, but the government takes in $2 trillion in revenue. That’s 9 times more than what is needed to pay the interest, so no chance of default there. What happens when $100 billion in Treasury bonds mature and we have to pay off the principle? How can we do that and pay our other bills? Easy, the Treasury sells new Treasury bonds for $100 billion to pay off the maturing bonds. The Treasury does this all the time and it doesn’t raise our debt by a single cent. You don’t need to raise the debt ceiling to replace old debt with new debt, you only need to raise it if you want to add to the debt. Once again, no chance of default.

When the feds talk about default they include things that have nothing to do with paying our debt. The salary of the NSA agent who is cyberstalking your wife. The fuel for the drone that just killed a 16 year-old girl in Somalia. A brand new box of Top Flite balls for the President’s next round of golf. There will be low priority bills that are paid late if the debt ceiling isn’t raised, but making the treadmill repairman for the Congressional gym wait an extra month to get paid is not the same as defaulting on the debt.

But don’t take my word for it, listen to Jack Lew. He says if we default, interest rates will skyrocket. The cost of mortgages, car loans, and student loans will become unaffordable. It’s only a few days until this catastrophic event is supposed to happen, are interest rates climbing to the moon? One month ago the rate on a 10 Year US Treasury Bond was 2.89%. It is now down to 2.69%. Rates are going down not up, the opposite of Lew’s prediction. The people who make a living buying a selling US debt know there won’t be a default no matter what happens to the debt ceiling. Lew is BSing you.

All the talk of economic slowdown, lack of essential government services, and dire predictions of default are pure manure. The government wants you to be scared because scared people don’t think clearly, and a clear thinking electorate is their worst nightmare.

About Author

Wayne Middlesteadt

Wayne Middlesteadt is a 1986 graduate of Georgia Tech and has an MBA from Georgia State University. Currently working as a financial writer and track and field historian, his latest book is Five Ways To Beat The Market.