The US government shut down on Monday night, with no knowing when it can reopen. A default on US Treasuries is a fortnight away, and right wing Republicans are determined to hold the nation’s feet to the fire, hoping to use the budget and debt ceiling crunch to roll back Obamacare.
The shutdown will start eating into economic growth immediately, while the disruption and shock that would follow even a temporary default are almost too horrendous to contemplate.
Yet the S&P 500 yawned yesterday, settling by just 0.6%. The market has climbed 24%, virtually in a straight line, since President Obama’s re-election in November 2012, and is only 2.5% off its record high.
Astonishingly, even the grumpy Europeans were buyers on Tuesday with the Euro Stoxx 50 is up 0.6% in the morning.
‘Keep calm and carry on’ is a slogan supposed to epitomise British values of steadfastness in adversity. What is the American equivalent?
Something more vigorous is called for, to judge by the market reaction to the latest insanity in Congress. ‘Hell, let’s get on with it’ would be a start — spice up the expletive if desired.
Are markets crazy? "Well, duh!" would be one response. From the team that brought you Asian Crisis, Dotcom Bubble and Subprime Debacle — now, Fiddling while Washington Burns.
On the other hand, what are investors supposed to do? Sell stocks and/or Treasuries, triggering huge losses, to teach politicians a primary school lesson about economics? Or get on with the business of investing in a recovering economy?
Investors are looking forward to a US corporate earnings season in which most firms are expected to show fat rises in profits. In Europe, there’s a whiff of hope that Italy could return to growth, however anaemic, by the end of the year — whatever mischief ex-premier Silvio Berlusconi foments.
A government shutdown, as long as it’s temporary, is an economic own goal and damages the prestige of US democracy overseas — but not a catastrophe.
A debt default would be an utter disaster, undermining confidence in the financial system and hastening the end of the dollar’s status as pre-eminent reserve currency. But there is no preparing for such an event. It would not so much be a black swan as a black flying elephant.
Human beings are pretty good at living with the threat of calamity — from famines and floods, to nuclear disaster and climate change. ‘Hell, let’s get on with it’ is not just a natural reaction, it’s attractively plucky.
But it shouldn’t mean elected politicians can abdicate responsibility. The people in markets should tell their representatives in Congress: ‘Sort it out!’
