For the first time since 1995, the US Government has finally shut down thanks to no agreement between the Democratic controlled Senate and the Republican controlled House in passing any federal spending bills for 2014. The key point of contention was the Republican party's desire to prevent the Affordable Care Act (Obamacare) from happening.
As a result of the 1995 shutdown, Republicans became public enemy #1 and President Bill Clinton got reelected in 1996. Newt Gingrich became a newt and America didn't see a Republican president again until the Bush years. I'd like to share with everybody some brief thoughts about the implications of a partial US government shutdown that may be too sensitive to discuss elsewhere.
WHAT DOES THE US GOVERNMENT SHUTDOWN MEAN?
* A Democrat Will Win The 2016 Presidential Election Again. After seeing how homogenous Mitt Romney's party was during his presidential campaign, it became a foregone conclusion that the Democrats would win again in 2016 if Republicans failed to be more representative of the US population. It's pretty clear, rightly or wrongly, that the public will blame Republicans more for the government shutdown since the bill was in the House's hands to pass. Americans are disappointed with President Obama's lack of leadership, but he is the lesser of the two evils. If the economy continues to recover, the American public isn't going to risk changing party leadership.
* A Wakeup Call To Non-Essential People. Imagine being one of the 800,000 (45% of total) federal employees furloughed because you are deemed “non-essential.” How would you feel? I'd feel like a loser who would be looking for a new job during my time off. Such a large number of non-essential employees also calls into question government efficiency and how big of a government do we really need? All employees should seriously evaluate their importance in a company if they want to increase their chances for survival. A simple question to ask is: Will my company be better off with me or without me?
* Big Government Is Suboptimal. The markets rallied higher on the day of the government shutdown. Given the markets are always right, smaller government is preferred over larger, bureaucratic, wasteful, inefficient government. If the government was really so important to the economy, the stock market would have crashed. As long as Social Security, Medicare, Veterans Care and our military are funded, everything else can wait, including the Pandacam that was shutoff at one of the zoos. Democrats, the Big Government Party, need to take heed and be careful not to get too omnipotent too quickly if they want to remain in power. Obamacare is probably as far as you can push the American people. Democrats should not regulate more of what we can eat, drink, or watch unless they want a revolution.
* Nothing Really Changes. 800,000 people being furloughed sounds like a lot, but 800,000 is only about 0.5% of America's 150 million person working population. For 99.5% of us, it's business as usual. The cost of a shutdown is a mere $1.6 billion a week compared to our annual output of $16 trillion. Meanwhile, nobody expects the 800,000 to be furloughed for more than a month. There's even a chance some of the furloughed employees can collect unemployment or receive backpay for work not performed! Just like how 99.5% of working Americans are not affected, 99.5% of facilities are not affected either. We can always go to Yellow Stone National Park next month. Furthermore, stocks performed +/-1% during and a month after the last 17 government shutdowns since 1976.
* We've Got To Look Out For Ourselves. Politicians love to talk about how they are working for the people they represent. I'm sure there is some truth to this. However, being a politician is all about power and ego. The reason why politicians flip flop on stances is because they need to be flexible to popular opinion in order to stay in power or get elected into power. The President and Congress will continue to receive their paychecks despite the government shutdown. The asymmetric treatment is astounding. What's more astounding is that the average politician is a multi-millionaire and few or none of them are willing to reject their paychecks in solidarity to the 800,000 furloughed colleagues and perhaps millions others who are adversely affected.
* Now Is A Great Time To Apply For Government Jobs. There should be less people applying for government jobs given the all-time low approval ratings. Relative stability and fantastic pensions are hallmarks of government work, besides the ability to serve the country. The capitalized value of a pension for someone who retires at 62 making $80,000 his last year and dies at 85 is worth well over a million dollars if we assume a 70% of salary pension amount. How many people in the private sector can save over $1 million dollars making less than $80,000 a year by the time they turn 62? Hopefully every reader on Financial Samurai, but only a small minority of the American population.
* Now Is The Time To Be A Cash Buyer Of Property. After a week of shutdown, there is going to be an increasing delay for mortgage approvals as lenders are blocked from verifying Social Security numbers and accessing IRS tax transcripts. Federal Housing Administration loans will also be really slow going as only 67 of the usual 2,900 works are currently working. Cash buyers should be able to finagle even better deals given the biggest fear a seller has is not closing and having to go through the entire process again with a new buyer.
* One More Reason To Seek Financial Independence. The people who are most upset or worried about a government shutdown are the people who depend on the government the most. Eventually, everyone will be negatively effected if the shutdown lasts long enough because our sovereign credit rating will get downgraded, causing Treasuries to drop, interest rates to rise, and stocks to fall, however, if you are financially independent with a properly diversified net worth you'll be able to withstand the hits. Also see The Proper Allocation Of Stocks And Bonds By Age. Depending on the government to survive is the polar opposite of financial independence.
THINGS JUST GET BETTER
The uncanny ability of the US Government to shoot themselves in the foot only helps to make it more difficult for the wrong people to enter office. The American people will scrutinize much harder during the next election. We've become a mockery on the global stage. But I'm not embarrassed because I only expect tax bills and anything else is a bonus. Maybe even those will stop coming if I relocate abroad.
America is still the greatest country on Earth. I'm very pleased that slowly Americans are waking up to the fact that we don't need such a huge government to move forward. Perhaps I'll no longer have to argue my case as to why contributing or converting to a ROTH IRA to fund the government before maxing out your 401(k) is not ideal. Perhaps more people will follow the absolutely logical 1/10th rule for car buying to minimize their chances of government dependency. Maybe the government shutdown might even persuade procrastinators to finally start building passive income streams to live free. Don't depend on the government. They have a great way of letting us all down!
Readers, what other implications do you see from the government shutdown? Anybody optimistic that the debt ceiling will be raised on Oct 17 without a fight?
Other Points From Government Shutdown:
* Approximately 400 national parks, museums and historical sites are closed.
* The “Pay Our Military Act” ensures our men and women in uniform continue to get paid.
* 1,6000 Head Start programs affecting 1 million low-income children will begin gradually closing down.
* Food Stamps (SNAP) will continue to get paid.
* The CDC is halting its annual seasonal influenza program.
* The US Postal Service will continue to deliver.
* The IRS is closed, but you still owe taxes.
Photo: Boar shutdown in Mexico, 2013, FS.