A group of House Republicans vehemently disagree with the Affordable Care Act (aka ObamaCare) and believe constituents voted for them in 2010 to represent their discontent with its long-term budget consequences. These Representatives want to delay its implementation in exchange for passing a budget plan and increasing the debt ceiling.
Democrats believe the referendum on ObamaCare occurred in the 2012 Presidential election along with the Supreme Court upholding it and will not negotiate on any aspect of it. Democrats, the President, and a group of Republicans would like to pass a budget and increase the debt ceiling but will not negotiate on ObamaCare since it passed as law.
So with that, the United States federal government shutdown on October 1st. This includes the IRS, national parks, and many other agencies.
The Treasury believes it has enough funds until late October and there are several short term measures to extend its cash flow further. In a worst-case scenario, the President could raise the debt ceiling by Executive Order.
What will financial markets do?
Financial markets so far gave a collective shrug of the shoulders. Stock and bond markets are little changed despite the impasse, though T-bills due to mature in October just recently dropped due to concerns about payment at maturity. While the consensus expects a resolution, the risk is a big mistake out of Washington. If the fight extends for long periods, it could impact growth estimates and company fundamentals, but for now there are much more important factors affecting capital markets. We believe clients should focus on investment process over outcomes, given that one-off political events provide a lot of noise but little signal for investors.
What happens next?
The political insiders and analysts we speak with consider a range of possibilities. A likely scenario is that a short-term debt ceiling extensions pass until late December, a month during which more heated negotiations may come. We may need to get used to this as another nine month extension could put this up for further debate during the 2014 mid-term election season.
A time honored tactic in Washington is to line up a lot of events at once to help leverage negotiations. And as much as the American people would like a compromise, this does not help reelection or money raising – which is the main objective for most politicians.
If you have any questions regarding the shutdown, your investments or your financial future, please contact us 440-449-6800.
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