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Why the US shutdown is just a dress rehearsal

So the US government shutdown has come to pass. Two political parties are more intent on prosecuting their version of ‘good government’ than actually providing it.

Clearly, this could only happen in America… not here, right? Interestingly enough, apparently some commentators are holding up the 1975 dismissal of the Whitlam government as a potential solution to the woes of the US political system!

US Lawmakers 1, Fool 0

I have to be honest. I thought the US politicians would have enough self-interest to avoid this situation – especially the Republicans, given the boost their party gave a then-unpopular President Clinton, who came out of it looking moderate while the Republican-dominated Congress was seen as trouble-makers following the 1995 shutdown.

I don’t know how the American people will apportion blame this time, but it’s a fair bet no-one comes out of this one looking good.

The budget impasse that has led to the government shutdown is only the entrée, however. The real deal, economically speaking, is the upcoming vote to increase the country’s debt ceiling. Make no mistake – this is a purely politically created problem with a purely political solution. There is no economic or democratic need for such a ceiling. It was implemented to make a political point, and is usually – and without fanfare – raised as a matter of course. Except, of course, if there’s political capital to be made when neither party controls all of the branches of the US government.

I was wrong on the shutdown, but I hope I’m right on the debt ceiling debate. While the shutdown means some public servants won’t get paid (or might simply be paid late, as happened last time) and some government services won’t be provided, it’s a storm in a teacup. If the debt ceiling isn’t raised, the most powerful economic nation on earth won’t be able to make repayments on the national credit card.

Uncertainty writ large… and ominous

At first blush, that doesn’t seem like a big problem, but when the US dollar is the world’s reserve currency and US government bonds are seen as the least risky instrument in the investment world, it’s a problem. To the rest of the world (and some of its own citizens), the United States wouldn’t be as good as its word any time – and that’s a confidence killer.

As both commentators and government officials have admitted, no-one knows what exactly would come next. (There’s simply no precedent.) But it’s a fair bet to suggest that we don’t want to find out. The impact on exchange rates, mortgage rates and the ability for the US to raise effectively unlimited funds would all be called into question. For a global economy that is only now shaking off the last vestiges of fear and uncertainty caused by the GFC, this would mean a serious and potentially long-lasting relapse.

And yet, there’s hope. US House of Representatives Speaker John Boehner is the most senior and powerful Republican on Capitol Hill. Overnight, Boehner apparently told Republicans that he wouldn’t let the US default on its debt. Master investor Warren Buffett told US business news network CNBC that he thought US lawmakers “will go right up to the point of extreme idiocy” but not past that point.

Plough on, or head for the hills

As investors, there really are only two options. Either you decide the risk of default is both real and probable, and you cash out everything, buy physical gold and stock up on baked beans and bottled water, or you trust that while the US politicians seem crazy, they’re not really crazy enough to willingly plunge the US into an economic morass that would rival (and possibly exceed) that of the global financial crisis.

However, in real terms, those trying to ‘position their portfolios’ for catastrophe are fiddling while they expect Rome to burn. If you reduce your exposure to shares by 5% or 10%, you’re still risking the rest. And if you’re in bonds, well, I don’t think anyone knows what to expect there either.

Now let’s think about 2018. Here in Australia, in five years’ time, Woolworths (ASX: WOW) will be selling more groceries, Telstra (ASX: TLS) customers will be greater in number – and, no doubt, more data hungry than ever. Cochlear (ASX: COH) will be selling more hearing implants, and Resmed (ASX: RMD) will be treating more cases of sleep apnoea.

In this context, the fascination over the debt ceiling is very short-sighted – by both the politicians and those traders and investors who are predicting doom and gloom.

Foolish takeaway

Political cynicism holds that no politician ever lost office by underestimating the intelligence of the electorate. I hope the US electorate, and investors the world over, haven’t underestimated the bloody-mindedness of the US parliamentarians.

In the meantime, I’m taking a leaf out of Warren Buffett’s book, and concentrating on what I can control – finding great investment ideas. If the market wants to take a wobble while it obsesses over the debt ceiling, even better – there are some great companies I’d like to buy a little cheaper.

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Motley Fool writer/analyst Scott Phillips owns shares in Woolworths and Telstra.

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