Last night, my wife asked me what I thought about the impending government shutdown.
- Would it ruin the economy?
- Is the government really out of money?
- You know Molly (a friend) has already been furloughed up in Washington?
- What does this mean for the border?
She had a lot of questions, and was obviously very concerned.
I gave her the most comforting and sage advice I could conjure: “don’t worry about it, baby, we aren’t bureaucrats. Also, Molly will be fine.”
Well, it seems she didn’t appreciate my patronizing non-answer, who can blame her, and pressed the issue. So much so, I started prattling on about how the U.S. Treasury borrows in its own currency, so it will never have to default on its debt unless it wants to do so. I reminded her of the Administration’s proposed budget(s) over the next decade, and how Capitol Hill spends our money. I also mentioned Washington doesn’t have a money problem, it has an inefficiency-with-money problem.
Finally, I told her Molly will ultimately get everything she deserves once the politicians quit trying to win points with people who were going to vote for them anyhow. After all, we have been there and done that how many times in the past? It would be comical if it weren’t so tragic. Or would it be the other way around?
While the original patronization was bad, Beth started to get a little glassy-eyed when I went full econ nerd on her.
The Treasury borrows in its own currency? There are 5 primary line items in the U.S. budget, which one do we cut? Revenue exceeds debt service by trillions of dollars? There’s no threat to the U.S. dollar as the world’s primary reserve currency? U.S. immigration policy needs a major overhaul, one which reflects our real need to find semi-skilled workers?
Yeah, that sort of stuff isn’t your usual cocktail party conversation. I suppose that might be part of the reason why I don’t get invited to a lot of cocktail parties, huh? Any, really.
I apologize if I seem a little blasé about the issue. On its face, it does seem pretty weighty. But is it really something that should keep us up at night?
THE MARKETS
If the markets are an indicator of anything, it wouldn’t appear so. Today, at roughly 10:00 am CDT, the bond market is having a relatively nice little rally, meaning interest rates are going down. Now, think about it, if investors were truly worried the U.S. wasn’t going to pay its debt, would they be buying it? Of course not.
For their part, domestic stock investors have extended yesterday’s gains a little. It seems this morning’s economic data is more important than an engineered shutdown in some aspects of the Federal government daily activities. Without going into exhaustive detail about it, let’s just say the PCE Core Deflator for August was slightly better than expected.
PERSONAL CONSUMPTION EXPENDITURES
That last line is a doozy, isn’t it? What does that even mean? The PCE Core Deflator? What? No more cocktail parties for me, ever?
Fair enough.
PCE is an acronym for ‘personal consumption expenditures.’ Deflator is an awkward synonym, in this instance, for inflation. Finally, as it pertains to inflation, ‘core’ means all items BUT food & energy. The reason why analysts care about ‘core’ inflation is because they can be very volatile from one day, week or month to the next.
In any event, cooler monthly inflation data, as this was, might mean the Federal Reserve doesn’t have to be as aggressive as it has been. Or so the thought process goes. Ergo the rally in the bond market which has extended to stocks, at least as I type.
THE SHUTDOWN
But that doesn’t address the upcoming government shutdown, does it? No, and it certainly doesn’t address the next one or the one after that. They could be very common moving forward.
Here is a sneaky little secret. According to Table S-3 in the White Houses’ proposed budget, Washington could eliminate all ‘non-defense discretionary programs’ in 2024, and the Treasury would still run an $871 billion deficit. You read that right. Even scarier, in 2033, the deficit would be, drum roll, $1.4 trillion, again, without those programs.
These numbers are hard to grasp. All the more so when you realize the Federal government currently expects to collect $4.72 trillion next year and $7.42 trillion in 2033.
It almost makes you wonder what a good IRS official could do to make up the difference, doesn’t it?
I will cut to the quick, raising taxes alone won’t accomplish much. Nor will shaving this or that discretionary program.
If history serves as a guide, and it usually does, the best way to close these massive deficits is to greatly expand the economy. After all, a bigger economy means more money to tax, doesn’t it?
But how to do that?
Without going into a lengthy discussion about marginal tax rates and the Laffer Curve, the best place to start is to ask ourselves a simple question: Are regulations and/or restrictions on business expensive? Do they increase potential capacity on productive initiatives or reduce it?
Anyone who has ever been in business knows the answers to these questions. Regulations are expensive and time-consuming. If companies have to spend money on complying with them, they have less money to spend on, well, making money. That is still what we want companies to do, isn’t it? Shoot, that is what we want for our employees too, right?
So, if companies have to spend more money on complying with regulations, intuitively, that means there is less for salaries elsewhere, reinvestment, dividends, charitable donations and a host of other virtuous activities. But someone, somewhere, apparently isn’t getting the message.
According to the National Bureau of Economic Research, the cost of compliance has soared since the start of the century. What’s more, its research focuses ONLY on the labor cost of regulatory compliance. It omitted the impact(s) on capital expenditures, lost profits, and the cost of outsourcing. As such, no one fully knows just how expensive all of these rules and regulations are on business. However, it is safe to say it is in the hundreds of billions of dollars.
It is scary stuff, especially when the government needs to collect even more money than it already does. This begs yet another question. If the government needs more money to pay its bills, doesn’t it seem like it would want me and my employers to grow our wallets nice and fat in order to have more money to tax? Or is that too sensible?
In the end, until such time that we decide to unfetter business, quit worrying about what CEOs at S&P 500 companies make in stock option awards and start getting serious about crushing the competition, we will continue to have government shutdowns. Admittedly, I am an ardent capitalist, but it seems so logical to me.
Perhaps I should have led with that in my discussion with Beth last night.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.