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September
28
2023

Here’s How Much the Imminent Government Shutdown Will Cost You
Peter Reagan

Here’s something you don’t want to hear from your political leaders, especially in the federal government:

“Our financial ship is sinking.”

Yet that’s exactly how Tennessee Representative Tim Burchett recently described the situation.

He made this statement because the U.S. government can’t reach a resolution that would keep its own operations funded.

They need to do that by month-end:

Current spending laws are due to expire on Sept. 30. That means if Congress does not reach an agreement before 12:01 a.m. on Oct. 1, the government will shut down. House Republicans on Thursday sent the chamber into recess, delaying further developments in the negotiations.

We’re just a few days away from the deadline now.

Unfortunately, this is increasingly becoming business-as-usual in Washington… Shutdowns have happened at least 11 times since 1980, with the longest one lasting 34 days back in 2018.

This time, the stakes are either higher than ever, or absurdly small, depending on your perspective. The current debate is focused on $120 billion in discretionary spending. That’s 7.5% of the total discretionary spending budget – but less than 2% of the total federal budget which includes mandatory spending on programs like Social Security, Medicare, Medicaid and so on.

We simply don’t know yet whether we’ll see another shutdown, or how long it will last. However, we can assess the economic consequences of a government shutdown.

How much does it cost to save $120 billion?

Economic impact of a federal government shutdown (by the numbers)

We’ll start with some potential economic consequences of a shutdown, even if it only lasts a short time:

The U.S. Chamber of Commerce warned, “A well-functioning economyrequires a functioning government.”

Goldman Sachs has estimated that a shutdown would reduce economic growth by 0.2% every week it lasted.

Millions of federal workers face delayed paychecks when the government shuts down, including many of the roughly 2 million military personnel and more than 2 million civilian workers across the nation.

The travel sector could lose $140 million daily in a shutdown…

That’s right – there are measurable costs to individuals (federal employees and active-duty military personnel). And to individual economic sectors, like travel.

And to overall economic growth! Roughly $54 billion per week, based on Goldman Sachs’s estimate. Keep in mind that lost economic growth also results in lower tax receipts for the federal government.

Thankfully, the article continued with a bit of good news: “Social Security checks, for example, will still go out.” Thank goodness for that.

But if the shutdown were prolonged for more than a few weeks, a Guardian piece highlighted some further risks of a longer shutdown:

Other government workers who perform what are judged essential services, such as air traffic controllers and law enforcement officials, continue to work but do not get paid until Congress acts to end the shutdown.

Passport processing can stop, as can research – at national health institutes.

The Biden administration has warned that federal inspections ensuring food safety and prevention of the release of dangerous materials into drinking water could stop for the duration of the shutdown.

Nothing tells your employees you really care about them like forcing them to work without pay for an unspecified period!

As usual, shutdowns have an outsized impact on the less fortunate, in this case food benefits could also end up suffering:

The Supplemental Nutrition Assistance Program, or SNAP, which provides food benefits to millions of low-income families, would continue throughout the month of October, he said. But if the shutdown drags on longer than October, SNAP funding would be put at risk.

During the last government shutdown four years ago, the government nearly ran out of SNAP funding that would’ve affected some 40 million Americans.

The biggest consequence of a government shutdown is a lot more difficult to measure.

Let me repeat something we quoted above:

“A well-functioning economy requires a functioning government.”

If I saw a headline about a government shutdown sparked by an attempt to cut overall spending by less than 2%, I’d laugh. Sure, you might expect to see stories about that level of dysfunction from places like Argentina or Lebanon.

But the U.S.? Really?

This simply doesn’t seem to be that difficult a problem! If I challenged you to cut your personal expenditures by 2%, could you do it?

Of course you could! Even though your personal spending (like the federal government’s) mostly goes toward “mandatory” non-negotiable categories like housing, food and transportation.

The inability to agree on even an extremely modest cut in spending has brought our government to its knees.

And, as you’d expect, the world has taken notice. In fact, Moody’s just warned the U.S. could suffer yet another downgrade in its credit rating:

A shutdown would be “credit negative for the US sovereign”…

Moody’s said it would “underscore the weakness” of U.S. institutional and governance strength compared to countries with similar credit ratings.

“In particular, it would demonstrate the significant constraints that intensifying political polarization puts on fiscal policy making at a time of declining fiscal strength,” Moody’s report reads.

Gridlock plus declining fiscal strength do not sound like the characteristics of a good borrower, do they?

And to make matters worse, the federal government is still going to the rest of the world with its hand out, asking for more loans.

Eventually, the federal government will work this out. One side will capitulate because that’s what always happens – and the spending will continue. Whether the total budget ends up at $6.9 trillion or $6.78 trillion, the national debt will grow more than $1 trillion.

That’s on top of the $33 trillion the federal government has already borrowed!

Is there a plan to pay it back?

No, there is not.

Where’s all the new money going to come from? Who in their right minds would throw good money after bad?

How much longer can the federal government rely on the rest of the world’s goodwill to finance $1 trillion a year deficits?

(Are you starting to see why the BRICS de-dollarization program might be motivated more by economics than by politics?)

I simply don’t know how much longer the federal government will be able to keep writing IOUs with a straight face. I don’t know how much longer anyone will be willing to accept them. My colleague Phillip Patrick wrote about this very issue earlier this week.

Congress may or may not get their act together over the next few days. They may or may not manage to shave less than 2% from overall government spending.

Either way, there’s still a $1.6 trillion dollar hole in the 2023 budget.

There are undoubtedly direct economic impacts from a government shutdown, like I described earlier. There are much worse economic consequences from multi-trillion-dollar deficits!

A shutdown damages confidence in government, granted. A budget that relies on unlimited borrowing for the next decade, I would argue, damages confidence a whole lot more.

There are some assets you can still trust

While it’s difficult to place any trust in a dysfunctional government, there are a few assets that have historically been relied on as safe havens. Especially physical gold and silver.

Think about it: Physical precious metals are just about the only financial asset without counterparty risk. (That means they aren’t IOUs or promises to pay.) We explain this concept in greater detail here.

Cash is another time-honored safe haven asset for uncertain economic times. Just keep in mind that, as faith in the U.S. government’s intention or ability to make good on its debts declines, the dollar’s value generally follows. Gold, on the other hand, tends to rise in price as the dollar’s value declines.

If you want to learn more, we’ve developed a free kit, packed with everything you need to know. Once you truly understand the challenges we face, I trust you’ll make the best decision for your own financial future.

 

 

Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver.

 

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