Why the Government Shutdown Is a Good Thing
“Obama says he won’t give an inch,” said a French friend last night.
He had just watched the evening news.
“What’s going on over there? Are they crazy?”
We checked the headlines.
The Financial Times in London took an apocalyptic approach… with seductive psychological undertones: “America flirts with self-destruction.”
Will the flirtation go anywhere? Will this dance de l’amour lead to a full carnal embrace?
Wait a minute…
Why would not funding the federal government cause self-destruction?
Every expert warns about how dangerous this is for the economy. Every talking head on TV… every commentator… every analyst. All presume or explicitly announce that cutting off federal spending would be a BAD THING.
The stock market didn’t seem to give a damn yesterday. It rose modestly. And gold – which should be soaring as people rush to buy gold coins, bars, rifles and ammunition – instead dropped an amazing $40 an ounce. (More on this below.)
How could this be?
Gold is what you buy when you begin to lose confidence. What could be going on? The end of the world (as we have known it) is announced and confidence actually goes up!
Let’s look at another government shutdown headline: “Capital Digs in for the Long Haul,” says the Wall Street Journal.
Resignation seemed to be the dominant tone in the US press.
A Bunch of Toadies
Bloomberg looked at the matter from a couple of angles.
First, it looked at the democratic implications, noting that “Americans by 72% Oppose Shutdown Tied to Health Care Cuts.”
The headline leaves some ambiguity; perhaps the Americans surveyed would approve of a shutdown tied to cuts in education or defense spending.
Then Bloomberg looks at it from an economic standpoint. How much will this thing cost? It soon finds a source willing to make an estimate: “Shutdown to cost $300 million a day, IHS says.”
Who’s IHS? We had the same question. Bloomberg explains:
A partial shutdown of the federal government will cost the U.S. at least $300 million a day in lost economic output at the start, according to IHS Inc.
While that is a small fraction of the country’s $15.7 trillion economy, the daily impact of a shutdown is likely to accelerate if it continues as it depresses confidence and spending by businesses and consumers.
Lexington, Massachusetts-based IHS, a global market research firm, estimates that its forecast for 2.2% annualized growth in the fourth quarter will be reduced 0.2 percentage point in a weeklong shutdown.
A 21-day closing like the one in 1995-96 could cut growth by 0.9 to 1.4 percentage point, according to Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia.
“Government spending touches every aspect of the economy, and disruption of spending, more than the direct loss of income, threatens to damage investor and business confidence in ways that can seriously harm economic growth,” LeBas said yesterday in an interview.
That’s it. We can’t take anymore. The economics profession has turned itself into a bunch of toadies for the politicians and world-improvers. The nonsense. The claptrap. It’s time to stand up and be counted!
Well, is there anybody else? Are we all alone?
Trade and Persuasion
As we explained yesterday, there are two ways to get what you want. Force and violence on the one hand. Or trade and persuasion on the other. (Somewhere in the middle is fraud. But let’s ignore that for the moment.)
An economy is built on trade and persuasion. You have to do something that others will pay you for. You make something. You offer some service.
Others do the same – offering you something that you want. One makes a pair of shoes… another brews some beer. Oh, you know how it works!
But one part of the economy doesn’t work that way. That’s the part that the government controls. That part depends on brute force. No customer has to be satisfied.
No real want has to be addressed. No meeting of the minds between buyer and seller ever has to take place. You pay your taxes or the feds put you in jail. You do as you are told (no jokes allowed in the TSA line!) or they put you in prison.
“America has changed so much,” continued our French friend. “I used to visit every summer when I was a teenager. It was a rite of passage for the French. America was so free. So different from Europe. We would go to California and hitch-hike up and down the coast. It was the 1960s. Everyone was unbelievably friendly and open. I loved it.
“But I went back just this summer. It’s a different place. They treat you like a war criminal when you go through customs. And you wouldn’t think of hitch-hiking. People are still nice. But that spirit of freedom seems to have disappeared. It’s a lot more like Europe now. But with more police.”
Yes, it is more like Europe, where government plays a larger role.
And now, would reducing the role of government really make people worse off?
Would less brute force in the economy really be such a disaster?
What if people only got more of what they really wanted… only what they could get by honest manufacture, trade and commerce?
What if the zombies were cut back?
Would that be so bad?
Expect More Pain for Gold Ahead
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
Today’s chart of gold ETF GLD will not warm the hearts of gold bulls…
Whatever your long-term view on gold, the yellow metal is trading in a decidedly ugly pattern right now.
Not only did GLD just knife below its recent bullish uptrend (sloping blue line on the chart), it’s also now trading below its 50-day moving average (curved blue line).
Moving averages show price momentum by averaging out prices over different periods of time. They help define areas of support and resistance.
And as you can see, GLD is already well below its 200-day moving average (curved red line), which represents the average price over the past 40 weeks.
Again, this is bearish, not bullish.
I’ve said it before. But I don’t recommend you buy any gold until we see a sustainable uptrend.
And the first thing to look for is a break above the 50-day moving average.
Right now, that sits at just under $130 a share.