What Would A Government Shutdown Mean For Markets? Goldman Explains

House Republican leaders are moving toward a vote Thursday to avoid a shutdown, but it’s unclear if there are enough GOP votes or if President Donald Trump’s tweets could derail their efforts.

That’s from CNN which is of course riding high on Thursday after “winning” at last night’s “dishonest media awards”, and it underscores the sheer absurdity inherent in the current D.C. quagmire.

We’ve said this over and over and we’ll say it again. Legislative ineptitude is a bipartisan problem. When it comes to gridlock inside the Beltway, it’s not “Republicans’ fault”. And it’s not “Democrats’ fault”. It’s everyone’s fault. Because all of these people were elected to legislate and increasingly, they are proving to be completely incapable of doing their job.

More disconcerting than that is the fact that they now seem to be legislating in order to get reelected rather than getting elected in order to legislate. It’s like watching an NFL game (don’t kneel during that anthem, dammit) where no one can move the ball and then suddenly, when it comes time for the 2-minute drill, everyone is just storming right up the field. It’s like “what the fuck?” Why can we only get something done if there’s a crisis on the horizon?

That said, the idea that the whole thing could be derailed at the last minute by Trump holed up in his bedroom tweeting crazy shit is a testament to the notion that this long ago crossed the line between pathetic (i.e. an inability on the part of lawmakers to compromise in order to keep the government running) and surreal (i.e. lawmakers not even being able to negotiate with each other because no one knows what Trump is going to tweet from his bathroom). Here’s what I mean:

CHIP should be part of a long term solution, not a 30 Day, or short term, extension!

— Donald J. Trump (@realDonaldTrump) January 18, 2018

As Bloomberg notes, “the current version of a short-term spending bill provides money for six-year extension of the popular Children’s Health Insurance Program.” And as VOX puts it, “attaching CHIP funding to a short-term budget bill is literally the plan that congressional Republicans are currently pushing on Capitol Hill.” Or at least it was “the” plan.

You get the idea. This is a clusterfuck.

Whether or not a shutdown actually happens this week, you can bet this is going to keep coming up because as you’re no doubt acutely aware, about the only thing you can count on out of Washington is everyone kicking the proverbial can, thereby ensuring that we’ll be having this discussion again at some point soon.

So in light of that, Goldman is out with a new note detailing what the effects of shutdowns tend to be. Here’s what the bank says about the odds this time around:

The odds of a shutdown at the end of the week are much higher than usual. We think there is a 35% chance that Congress will fail to reach an agreement by the end of the week on extending government spending authority, which expires January 19. Shutdowns are rare–before 2013, the most recent shutdown had ended in early 1996– because a short-term extension is always a possibility if a long-term agreement cannot be reached. In the fiscal year that started October 1, 2017, Congress has already enacted multiple short-term extensions of spending authority, and Republican leaders hope to enact another short-term extension through February 16 this week.

But even if we avert a shutdown this week, Goldman says things will be worse next month for the following three reasons:

First, the decisions are likely to be harder. Next month, Congress is likely to try to assemble a legislative package that includes, among other things, an extension of spending authority through the remainder of the fiscal year, an increase in the caps on spending in FY2018 and FY2019 of around $100bn per year, additional disaster relief funds, a suspension of the debt limit into 2019, and an immigration agreement that pairs a DACA compromise with border enforcement funding.
Second, another short-term extension might be difficult. While a short-term stopgap measure might be an acceptable compromise this week, another short-term extension next month is less likely to be acceptable to congressional Democrats, as they are likely to press for a permanent solution to the DACA program ahead of the March 5 deadline noted above. More generally, we expect that many lawmakers have grown increasingly wary of further temporary extensions and might decline to support another continuing resolution next month.
Third, the risks to the economy and financial markets are somewhat higher in February than they are this month, due to the upcoming debt limit deadline. The Treasury appears to be targeting a February 28 deadline for the debt limit. While fiscal projections are particularly difficult right now given strong underlying revenue growth offset by the impact of the phase-in of tax cut, this estimate appears somewhat conservative to us and we expect that the Treasury should be able to continue borrowing through at least the first half of March, if necessary.

So, what does that mean for markets (let’s just leave aside the economy for now)? Well, Goldman notes that generally speaking, “markets have tended to shrug off shutdowns as long as the debt limit is not involved.” Here’s a visual history across equities, the dollar, bonds and T-Bills: