YOUR MIND ON MONEY: Shutdown could have troubling economic effect

2013-10-04T14:24:00Z 2013-10-04T17:42:12Z YOUR MIND ON MONEY: Shutdown could have troubling economic effectF. Marc Ruiz Times Business Columnist nwitimes.com
October 04, 2013 2:24 pm  • 

The long dreaded government shutdown has arrived and to make a point about how important the government really is to all of us, whoever makes these decisions has decided to close our parks and attempt to provide the maximum level of inconvenience possible.

When I hear about the government closing facilities that require no ongoing cost to keep open, like the WWII memorial, just to make a point, I find it absolutely bizarre.

The federal government still takes in about $225 billion per month, did they really need to rope off the park? At least the Washington monument was already hidden behind scaffolding during its restoration and was therefore all ready for the shutdown circus.

All kidding aside, the situation is troubling. Most of us have heard the real issue is not the shutdown, but rather the prospect of what could happen when the government actually runs out of the money it needs to operate. Without legal authority to borrow more money – the Treasury has announced this will happen sometime around the 17th of the month – this is when the truly tough decisions will be made.

One remote possibility is the federal government could decide to defer principal or interest payments on U.S. Treasury securities. This action, called default, would be the most catastrophic financial incident in our nation’s history, and would have implications beyond anticipation. While every expert I read is insistent on the unlikeliness of this possibility, it is still important to understand what this scenario might entail.

A U.S. Treasury default would have to result in a credit rating downgrade for U.S. Treasury securities. This downgrade would directly impact banks, pensions and insurance companies. All of these types of institutions use AAA rated U.S. Treasuries as the foundation of their investment portfolios, and any credit downgrade would immediately cause these portfolios to fall out of compliance.

While these institutions worked feverishly to restructure their bond portfolios, nearly all commercial lending would halt and the credit and money markets would seize.

This process started to occur during the 2008 credit crisis. During that crisis investors fled to the safety of U.S. Treasury securities, but during a Treasury default this strategy would be questionable and investors would attempt to find other havens.

Some might surmise this would destroy the value of the dollar as investors fled the U.S. for overseas markets. When the value of the dollar falls, inflation is the potential result, and I’ve heard some analysis concluding a U.S. Treasury default would lead to hyperinflation in the U.S.

I actually believe the opposite is true, and because we have two weeks before this potential disaster occurs, if we don't have a solution by next week we’ll discuss the other alternative.

Opinions are solely the writer's. F. Marc Ruiz is a local investment strategist and co-host of "Your Mind on Money" at noon Mondays on WLPR-FM 89.1 The Lakeshore. Reach him at yourmindonmoney@lakeshoreptv.com.

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