My Quick Take on Kevin McCarthy’s Departure
The US government is currently in a state of chaos, and it seems like this could spell trouble for the global economy.
We all know that Speaker of the House, Kevin McCarthy, just got the boot.
How may this effect the financial system?
It’s likely to increase the chances of a US government shutdown. The Republicans, now in control of the House, we’re pretty upset with McCarty’s actions.
This could lead to a deadlock in passing funding on November 17th, which is not too far away.
Recently, they managed to pass a stopgap bill to buy some time, but there are several contentious issues at play, like border control, funding for Ukraine, and budget cuts.
These sticking points make it highly likely that we’re headed towards a government shutdown.
Now, let’s talk about the impact on the markets. It’s possible that we might witness another stock market implosion.
When chaos and uncertainty reign, investors tend to flock to the US dollar and US treasuries. It’s like a default reaction, regardless of whether the uncertainty is caused by the US government itself.
So, expect the dollar and treasuries to strengthen in the coming 45 days.
The chances of concessions and compromises seem slim, and we need to prepare for the worst-case scenario: a serious government shutdown.
However, keep in mind that such a shutdown won’t last forever. The US economy heavily relies on deficit government spending, with around 35% to 40% of money flowing into the economy through government support.
If that money dries up, businesses will collapse, layoffs will occur, and the economy will suffer greatly.
But let’s not jump to conclusions just yet.
The Republicans might surprise us with a last-minute solution to avoid a shutdown, pushing the can down the road for another 45 or 30 days.
They’ll likely close ranks and make things difficult for the Democrats.
Now, let’s not forget the big picture. Massive deficit spending, inflation, and perpetual inflation remain the endgame. We should brace ourselves for extreme volatility in the markets. This could be the trigger for a US recession if things escalate or if the shutdown drags on.
To complicate matters further, the Federal Reserve is stuck.
Inflation remains high, and interest rates are already at 5.5%.
If a shutdown happens and funds dry up, what will Jerome Powell, the Fed Chair, do?
Dropping interest rates would be a clear admission of trouble for the US economy.
Keep an eye on bond yields, as they might spike, leading to massive sell-offs across the board.
Bond markets, gold, and even the stock market could face further declines in the next 45 days and beyond.
It all hinges on whether the US government can reach an agreement to avert or delay the shutdown.
In the midst of all this chaos, the Republicans are battling their own internal conflicts, while the Democrats push for their own agenda. It’s like a grand theater show, a song and dance routine that none of us really enjoy.
Yet, this is the reality of our global economy today.
