A government shutdown is not new. It has already happened eighteen times. But, how has the stock market reacted in the past? Take a look at this interesting graph:
The market falls for a few days before rising sharply, when investors realize the world did survive. After a little over-enthusiasm, the market then resumes its gradual, sustainable rise. Based on this, the market should start rising quickly today, but the futures market indicates another losing day.
The difference is that there has never been a simultaneous debt ceiling debacle. Therefore, I don't expect this big relief rally until confidence rises that a default on U.S. debt will be as survivable as another government shutdown. Then, I do expect a sharp rally.
Warren Buffet thinks a one or two-day technical default will not be "a big deal," and I agree. But, it is still embarrassing. It is like being a day or two late on your credit card bill . . . but worse.
There is considerable debate whether the Treasury Department has the legal authority to pay interest without simultaneously paying out Social Security checks. It might be far better to "act now, ask forgiveness later" by paying the interest bill now and asking the Social Security recipients for forgiveness later. Our creditors will be happier and those Social Security recipients, not suffering quietly, will besiege Congress to act like adults . . . finally.
