Here is a scenario that I imagine occurred throughout the country many times this week. Person comes home from a long day at work, half out of their mind from mental and physical exhaustion, they want to watch something on T.V. that doesn't require too much thought. However they know that between the federal shutdown, and the introduction of ObamaCare they want to see some news on the situation, perhaps get an inside perspective from some political pundits, or better yet a senator or congressman to explain how this may affect them. So after flipping around they come across some of the bigger cable news stations to get the lowdown.
Instead what they get is an exhausting assault from both sides of the isle. Sensationalistic 'news' anchors carefully conducting a blistering array of talking points from both Democrat and Republican. Not to be outdone of course is the dizzying onslaught of news scrawls, sound effects, patriotic colors, and split screen 'debate' that only leads to more confusion and misunderstanding.
So after taking that in for about 10 minutes, that person calmly reaches for the remote, and looks to see if college football is on, or perhaps something on the History Channel about how aliens built the Mall of America
This scenario wouldn't be so sad if it was the beginning of a movie about a guy who finds out the Mall of America was built by aliens and sets off on a pilgrimage to Bloomington Minnesota. But unfortunately this is not a movie, it is a very real account of the sad state of affairs that Washington has put Americans into.
It seems that Washington is having a hard enough time getting out of its own way, never mind that it is also dragging main street down with it. The stalemate that has put Washington in the situation of a shutdown with default on the horizon is only part of a story involving partisan politics fueled by bickering and spitefulness. All this happening while the economy has been sluggishly trying to recover from a collapse of the housing market that occurred five years ago.
Although a handful of government agencies have been closed, experts say that the shutdown should not have longterm effects on the economy. Perhaps one good side of the shutdown was that it delayed the monthly jobs report from coming out. The markets took this as good news to end the week as The Dow recovered some of the losses it accrued from early week uncertainty.
Uncertainty may continue to be the new norm in the markets, that is until investors know how the Fed will handle its 'tapering' of Q.E.3. Better known as quantitative easing, this technique has been used three times since the 08', has been met with skepticism and resistance every time. The reason being that there are many who feel that artificially infusing the economy with printed money from a central bank may have detrimental long-term effects. These effects may be felt in many ways; inflation, spike in interest rates, or spike in long term yield prices, or possibly another credit freeze.
The 'cliff note' version of government bailouts since the housing collapse goes like this.
2008: in an effort to save the economy from collapse the Bush Administration issues a massive government bailout that saved major banks that were then seen as 'too big to fail'. That decision drew a wave of controversy from American voters from both parties. The bailout of the bankers did little to gain in popularity when many of the bank CEO's decided to use that money to give themselves bonuses, while millions of Americans were drowning in debt.
Jump ahead to 2009 after newly elected President Barak Obama gets into office. In an effort to stimulate the 'recovery', one of his first acts as President is to issue another bailout, this time it's the large car companies (G.M., Chrysler) who reap the benefits, also followed by multiple government programs designed to stimulate job growth (i.e. 'Cash for Clunkers). Again there was outrage from American voters, this time it came predominately from the Tea Party; a fringe branch of the right wing, that seemed to object to President Obama's bailout and spending, but seemed to have a blind-spot for Bush's bailout and record spending
Now we move along to 2012 where Fed Chairman Ben Bernanke seeing that job growth has been sputtering, decides to take on another round of printing money. This time the approach is more low key, after a speech on the importance of Americans working, he issues Q.E.3 , which consists of the fed buying $85 billion worth of bonds each month. The effect of this is to keep the economy afloat as our 'usual suspects' of creditors (China) have seen this game before. The negative effect has been two-fold:
1. It has given markets a false sense of security in the economy. For the last couple of months Fed chairmen Ben Bernanke has been hinting at ending Q.E.3. Initially he simply came out with the goal of ending it when unemployment hit 6.5%, then he hinted that it may end sooner. This was met with trepidation, or to put it another way; the markets freaked out. Investors did not like this at all, and showed it with some big sell-offs. Perhaps they realize that the bounce back the markets displayed since 08' has had more to do with artificial events rather than anything tangible. As a result Ben Bernanke changed his plan from stopping Q.E.3, to the softer 'tapering', which has had a soothing effect to investors, very similar to how a baby reacts to a bedtime story.
Which brings us to the markets other big nightmare.
2. Interest Rates. It is unsure how the economy will be able to handle a rise in interest rates. - Not only have markets benefited from federal stimulus programs, they also have enjoyed a prolonged period of rock-bottom interests rates. Since 1971, never have the rates gone as low as it did in 2008, and never has it stayed as low as it has for this long a time. Interest rates began their plummet in the beginning of 08', roughly around the collapse of Lehman Bros; dipping from 4.5% to 2%. However in September, when the bottom fell out of the markets, they also finished the job for interest rates, plummeting them to nearly 0%. Interest rates flattened out at the bottom, and have stayed there for five and a half years. Which may be the most telling sign of this weak recovery.
Now factor in a situation if the U.S. had to default on its debt. Those very same treasuries that the Fed had bought, could be rendered useless which would follow by a subsequent plunging of the dollars value. Of course these are 'worst case scenarios' but horrifying reality is that Washington has flirted with too many of these scenarios in the past. Historically a U.S. default on debt is highly unlikely, but it seems like only a matter of time before all these problems become to big to deal with.
