Washington subdued as damage assessment begins
The skies turned grey in Washington Thursday. The mood in the capital was just as dark.
One might have expected at least quiet celebration. Late Wednesday, politicians ended a weeks-long standoff over the budget, passing legislation that re-instated the federal government’s spending authority and avoided a catastrophic debt default. Stock markets were buoyant: The Standard & Poor’s 500 index climbed to a record.
Instead, Washington was subdued, even as tens of thousands of previously furloughed workers returned to their jobs. Senators and representatives had retreated home. President Barack Obama spoke, declaring there were no winners in the budget showdown. Recent events, he said, had left America’s competitors “emboldened” and its friends “depressed.”
“We don’t know yet the full scope of the damage, but every analyst out there believes it slowed our growth,” Mr. Obama told an audience at the White House.
Later, he added that “probably nothing has done more damage to America’s credibility in the world, our standing with other countries, than the spectacle that we’ve seen these past several weeks.”
The President’s sombre tones reflect a sentiment that the world’s investors and business executives may be unwilling to give Washington a pass this time. Washington hasn’t passed a proper budget in years. Instead, politicians pass temporary measures, and almost always at the last minute.
Ever since Republicans regained control of the House in 2010, its leaders have sought to use budget deadlines as leverage to win concessions from Mr. Obama and the senate. Republicans had some success, forcing the Democratic majority in Washington to unwillingly accept spending cuts.
Outside Washington, it’s all become a little hard to take. Businesses can’t plan because they have no idea what policy will be beyond a few months. Investors and traders now have to factor in political uncertainty when buying U.S. debt, an asset that forms the foundation of the global financial system in large part because it’s supposed to be risk-free.
“The size of my defensive positions was fluctuating depending on who Eric Cantor had breakfast with,” said David Rolley, co-head of global fixed income at Loomis Sayles & Co. in Boston, referring to the No. 2 Republican in House of Representatives. “That’s no way to make a living.”
Stock markets rose, but perhaps only because traders bet that America’s self-inflicted wound would force the Federal Reserve to keep interest rates ultra-low for even longer. In contrast to equities, the U.S. dollar was lower against most every other major currency Thursday, suggesting a lack of confidence in the managers of the world’s primary unit of exchange.
“Some investors are probably a bit fed up with all the politics and think they shouldn’t have as many assets in the United States,” said Charles St-Arnaud, a former Bank of Canada economist who now is a currency strategist with Nomura Securities in New York.
Laurence Fink, chief executive officer of BlackRock Inc., the world’s biggest money manager with some $4.1-trillion in assets, told Bloomberg Television Thursday that his international clients are becoming increasingly unsure about investing in the United States.
“We’re trying to calm them,” Mr. Fink said. “But frankly, we need to see movement in the next three months toward a full resolution towards our budget and full resolution towards this constant dialogue about the debt ceiling.”
Economists spent Wednesday and Thursday adding up the potential economic cost of a government shutdown that lasted 16 days – far longer than many observers expected when Speaker John Boehner refused to co-operate with the Democratic-led Senate in extending the government’s spending authority at the start of the month.
Standard & Poor’s – the credit-rating agency that stripped the U.S. of its triple-A rating in 2011 after Congress skirted the debt ceiling – published a report that put the loss of gross domestic product at $24-billion.
That was on the high side of estimates. IHS Global Insight put the economic blow from lost government services at $3.1-billion, adding the reset of the economic impact was too hard to measure at such an early stage. The research firm nonetheless cut its estimate of fourth-quarter growth to an annual rate of 1.6 per cent from a pre-shutdown estimate of 2.2 per cent. Capital Economics, another research firm, reckons fourth-quarter growth will be less than 2 per cent.
Those numbers are more bump than body blow to a country with a gross domestic product of some $16-trillion. The bigger harm could be more subtle and may never show itself. There is every reason to think Washington’s chronic gridlock has slowed the U.S.’s world-beating swagger. Macroeconomic Advisers estimates that political uncertainty since 2009 has lowered economic growth by about $150-billion a year.
Nick Friedman, co-founder of the College Hunks junk-hauling and moving companies, said he lost a franchising opportunity because the candidate got spooked by the government shutdown.
“The long term is an issue,” said Clint Greenleaf, an entrepreneur who runs Greenleaf Book Group in Austin, Texas. “It’s another piece of evidence that America is losing its position as a bastion of capitalism and business success.”
Mr. Obama and other political leaders are trying hard to create the impression that Washington might finally have learned its lesson.
Patty Murray, the Senate budget committee chairwoman, and her House counterpart, Paul Ryan, met for breakfast Thursday to begin formal talks on a longer term financial plan. The president urged them to finish their work this year. He also called on Congress to seize the bipartisan spirit that avoided default to pass immigration and farm legislation that has languished for months.
But the damage could already be done. Fitch Ratings and Dominion Bond Rating Service, the third- and fourth-biggest credit-rating agencies, are reviewing their triple-A scores for the United Sates. And China, the U.S.’s biggest creditor and main competitor for international economic supremacy, is talking loudly about the need to “de-Americanize” the global economy.
“The Chinese are looking past this resolution,” said Gregory Chin, an associate professor of political science at York University and former Canadian diplomat in Beijing. “The question for them is whether the U.S. is ready to deal with fundamental issues such as the deficit and tax reform. Fixing those issues requires a political consensus that might not exist.”
THE ANATOMY OF A SHUTDOWN
The government’s spending authority was restored until Jan. 15, ending a partial shutdown, and the debt ceiling lifted through to at least Feb. 7, ending the threat of a default. Talks will now be held on a long-term budget. Andrew Grantham of CIBC World Markets:
“The third-longest U.S. government shutdown in modern history may be over, but the short-term nature of yesterday’s deal does little to inspire confidence.”
Standard & Poor’s estimates that the shutdown cost the United States $24-billion (U.S.) in lost output in a $16-trillion economy, and economists have trimmed their projections for growth in the fourth quarter of the year.
Then there’s the toll that can’t be calculated. Kit Juckes
of Société Générale: “Now, we can ponder how much economic momentum has been lost, how much confidence is hit by the long-term uncertainty the politicians have built into the system.”
The temporary nature of the deal raises the spectre of
another crisis in mid-January. Some observers believe the Republicans will be looking to score after licking their wounds, while others believe they will be chastened.
But the threat is real. Michael Hewson of CMC Markets: “While this staves off the immediate uncertainty it also means that we have to go through this entire circus again in the New Year.”
Observers believe the crisis, and the possibility of another one, could affect the timing of the Fed’s expected easing of its massive asset-buying program, known as quantitative easing. Derek Holt and Dov Zigler of the Bank of Nova Scotia: “It’s entirely possible that the Fed might be
looking at the same type of fiscal impasse at the
Jan. 28-29 meeting as it was looking at in September – and that tapering expectations could be pushed out further.”