US Government Shutdown: Markets Shrug, But Should They?

The current US government shutdown threat is unique due to a Trump administration memo proposing 'Reductions in Force' (RIFs) to permanently eliminate programs, escalating a temporary crisis into constitutional warfare that markets are underestimating.

• The looming government shutdown features a Trump memo proposing permanent job cuts (RIFs) to eliminate disliked programs, not just temporary furloughs.

• Markets are ignoring the shutdown, perceiving it as routine political theater, despite economists predicting significant and permanent GDP loss.

• This shutdown escalates constitutional hardball into 'constitutional warfare,' shifting power to the executive branch and eroding governance over time.

Markets are largely ignoring the looming US government shutdown, viewing it as another routine political tantrum despite the potential for unprecedented consequences. A bombshell memo from the Trump administration proposes using the shutdown not for temporary furloughs, but for permanent 'Reductions in Force' (RIFs) targeting programs inconsistent with the president's priorities, transforming a pause into a deletion of government functions. This escalation, termed 'executive aggrandisement,' represents a significant power grab by the executive branch at the expense of Congress, making this shutdown different from previous ones and potentially leading to systemic breakdown and long-term economic damage.

History of Shutdowns

• 00:00:58 The US government shutdown mechanism originated from the 1880 Anti-Deficiency Act, intended to prevent overspending, but was reinterpreted in 1980 by Attorney General Benjamin Civiletti to justify ceasing non-essential operations during funding gaps. Before 1980, shutdowns were non-existent, but since then, they have occurred 21 times, evolving into a political strategy for leverage, notably used by Newt Gingrich in 1995 and Ted Cruz in 2013. The 2018-2019 shutdown, the longest in history, highlighted the systemic dysfunction and demonstrated the government's willingness to hold itself hostage over policy disputes.

Impacts of Shutdowns

• 00:03:42 Previous shutdowns, particularly the 2018-2019 event, resulted in significant disruption, with 800,000 federal workers either furloughed or forced to work without pay, leading to critical service breakdowns like airport security issues, halted FDA inspections, and cancelled immigration hearings. The Congressional Budget Office estimated the 2018-2019 shutdown cost the US economy $11 billion, with $3 billion in permanently lost economic activity, while government contractors and small businesses suffered losses without back pay. The economic pain is real but diffuse, impacting government-dependent communities and industries not typically tracked by major market indices.

The 'Weaponized' Shutdown

• 00:09:21 This shutdown is distinct due to a Trump administration memo directing federal agencies to prepare for 'Reductions in Force' (RIFs), which are permanent job eliminations, rather than temporary furloughs. The memo instructs agencies to focus cuts on programs 'not consistent with the president's priorities,' effectively weaponizing the shutdown to permanently dismantle programs Congress has already funded. This unprecedented move represents 'constitutional warfare' and 'executive aggrandisement,' allowing the executive branch to expand its power by manipulating legal mechanisms during a crisis, transforming the shutdown from a temporary pause into a permanent deletion of government functions and jobs.

Market Indifference & Risks

• 00:12:25 Historically, markets have largely ignored government shutdowns, with the S&P 500 showing an average return of zero during these periods and often rising significantly 12 months later, treating them as mere political theater that doesn't impact core economic drivers like corporate earnings or Fed policy. However, credit rating agencies like Moody's and Fitch are now viewing these shutdowns as 'governance erosion,' contributing to America's sovereign risk premium and potentially leading to permanent increases in government borrowing costs. Furthermore, shutdowns cause real economic damage, impacting GDP, small businesses, and federal contractors, while also hindering the Federal Reserve's ability to make informed policy decisions due to a lack of economic data, raising the risk of policy mistakes.