Unlike the New York City we know now, just 3 decades back, in October of 1975, New York was deep in crisis. The city owed $453 million that was coming due soon but they only had $34 million on hand. The city would officially be bankrupt if they couldn't make up the difference fast. Their only hope was the pension funds from the Teachers' Retirement system.

The financial crisis had jeopardized the city's capacity to fulfill its fiscal commitments, forcing it to implement stringent measures such as mass layoffs of thousands of city employees, wage freezes for public workers, service cutbacks, and delayed payments to contractors.

Just 2 hours before the deadline, the teachers' union announced that they would put up $150 million from their pension funds. The immediate crisis was averted but New York had to get federal help to resolve the crisis.

While we aren't in such a dire situation now, in 3 more days, we’re most likely facing a Government Shutdown. So, let’s discuss what exactly a Govt. shutdown is, why we could see one on October 1st, and how this might impact you (and the stock market).

What is a Government Shutdown?

On the surface, all of this starts with something all of us have heard a lot about this year -- The Debt Ceiling.

The debt ceiling is the maximum amount of money that the U.S. Govt is allowed to borrow to pay for all its obligations -- like social security, medicare, military salaries, interest on national debt, etc. The $33 trillion national debt isn't there by accident. Lawmakers intentionally approve an overall budget that our country is able to spend – most of the time with an added deficit.

Even though we just had the debt ceiling drama and Congress agreed to raise the debt ceiling until 2025, how they actually allocate that money is an entirely different matter. In typical situations, these budgets are agreed upon by September 30th so that all spending is predetermined for the following fiscal year. If that doesn’t happen, just like the situation we are in now, we will end up with a government shutdown.

Even though it seems ridiculous that the government could quite literally shut down because Congress decides to argue amongst themselves, under the anti-deficiency act of 1884,

Therefore, if there's no bipartisan agreement within the next 3 days, federal agencies must cease all non-essential functions -- aka government shutdown.

Why?

The obvious next question is why can't Congress agree on a reasonable budget?

Normally, if politicians operated efficiently, a budget would pass through the House of Representatives, get approved by the Senate, and then be signed off by the president to go into effect.

But in 2023, there's a big issue: The House of Representatives is led by Republicans but the Senate is majority Democrat. For a bill to pass, everyone must come to an agreement, which means, one side has to compromise more than they want.

Further complicating the matter is that an agreement hasn't been reached even among the Republican members.

Even though I generally stay out of politics, for those who are curious exactly what this disagreement is about, it appears as though Kevin McCarthy, the House majority leader, has made promises to the right, ultra-right, and moderates in order to keep his job and stay in power.

As you might imagine, it's impossible to satisfy all of those demands and appease everyone, without splitting his group in half. So, his choice is simple: Try to push through spending cuts that would be dead on arrival in the Senate, thereby causing a Government Shutdown, or, give in to the majority demand to keep the money flowing and risk his job.

Something has to give.

The immediate impact of a Govt. shutdown

The White House has said that active-duty military and federal law enforcement personnel would be forced to work without pay until funds are appropriated, FEMA’s Disaster Relief Fund could be depleted and everything else from the TSA to the FDA (nearly every federally funded agency) would be impacted.

Goldman Sachs' economists also estimated that

What I personally found the most surprising was how a government shutdown impacts the stock market because I’ll be honest, it’s completely different from what you probably expect.

Govt. shutdowns and the stock market

The results are completely mixed. For example, the worst Government shutdown drop occurred in the 1970s with stocks down almost 4% but, in late 2018, the Government was shut down for over a month and the markets rallied over 13%.

In fact, according to Barron's,

The real issue, to me, is that a government shutdown would likely lead to a loss of confidence throughout the economy. The real impact falls on government employees who will either have to work without their full pay or get furloughed until things get back to normal.

Just like I had predicted in my video yesterday, AP reported that

As scary as it is to hear about The Government Shut Down, in reality, most of it comes down to a political game of chicken to see who blinks first in an effort to pass various agendas and then, at the last possible second before something permanently breaks they magically reach an agreement.

This means everything we’re seeing is mostly political theater, and unless you work for a federal agency, you probably don’t have anything to worry about, besides seeing lots of spooky headlines appearing across Reddit and CNBC.

Also, I had developed a one-shot solution to avoid govt. shutdowns forever :)

Graham Stephan @GrahamStephan Here's a simple way to avoid Government shutdowns: You just pass a law that says every time there is a Govt. shutdown, all sitting members of Congress are ineligible for reelection. https://twitter.com/i/web/status/1706851727885160448 7:32 AM • Sep 27, 2023 134 Retweets 1403 Likes Read 91 replies

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That's it for this week. I hope you enjoyed this article. Let me know your thoughts by responding to this email - I read every single comment :)

Stay safe, stay invested, and I will see you next week – Graham Stephan.

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