Economic Shutdown: Obama Plays his Trump Card

Team Obama has a new talking point: "Economic Shutdown." That’s how the president described what would happen if Congress doesn’t raise the debt ceiling.

As expected, the two political battles are merging into one — and Wall Street is finally noticing. One trader told Bloomberg, "The longer this goes on, people get a little more nervous. And when people get nervous they sell first and ask questions later."

Not surprisingly, then, the Dow Industrials closed below 15,000 today. As Geoff Garbacz pointed out in your morning edition, there have only been a duo of two-week losing streaks in 2013 … and history may be about to repeat itself.

The White House clearly wants to answer questions. It may even be generating them. Just in the last two days, Obama met with bank leaders, gave an interview to CNBC and played his trump card …

Social Security checks could stop.

The president said so himself.

***

The president used his new buzzword at a speech in Rockville, Md., today. He clearly wants to compare and contrast the government shutdown with a far more serious debt-ceiling collision.

"In a government shutdown, Social Security checks still go out on time. In an economic shutdown — if we don’t raise the debt ceiling — they don’t go out on time," Obama said.

"In a government shutdown, disability benefits still arrive on time. In an economic shutdown, they don’t."

[Source: Business Insider, 10/3/2013]

Also today, the Treasury Department issued a six-page report with the kind of language you don’t normally hear from government agencies.

"A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse …

"In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth — with many private-sector analysts believing that it would lead to events of the magnitude of late 2008 or worse, and the result then was a recession more severe than any seen since the Great Depression."

[Source: U.S. Treasury (PDF)]

The administration obviously wants to turn public opinion against the Republicans. They hit all the hot buttons: Social Security, 2008 financial crisis, recession, even the Great Depression.

***

Republicans responded swiftly: We need not worry about such dire consequences. The New York Times reported that John Boehner will act to prevent a default — accepting help from Democrats if necessary.

"With a budget deal still elusive and a deadline approaching on raising the debt ceiling, Speaker John A. Boehner has told colleagues that he is determined to prevent a federal default and is willing to pass a measure through a combination of Republican and Democratic votes, according to multiple House Republicans.

"One lawmaker, who spoke on the condition of anonymity, said Mr. Boehner had indicated he would be willing to violate the so-called ‘Hastert Rule’ if necessary to pass a debt-limit increase. The informal rule refers to a policy of not bringing to the floor any measure that does not have a majority of Republican votes.

"A spokesman for Mr. Boehner pushed back on the idea that the speaker would try to pass a debt-limit increase mainly with Democratic votes, but acknowledged that the speaker understood the need to head off a default."

[Source: New York Times, 10/3/2013]

***

The president’s warning may not be the full story. Legal experts say he could bypass the debt ceiling with several potential loopholes. The most common idea comes from the 14th Amendment to the Constitution, which says in part:

"The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

[Source: Wikipedia]

Theoretically, the president could assert that this provision makes the debt ceiling unconstitutional and simply ignore it. The Republicans would surely challenge him in court. No one really wants to go this route, but it could happen.

The president could also comply with the debt ceiling but still avoid default. He could do this by giving debt repayment priority over all other spending. At some point, this route would probably involve delaying Social Security, veterans’ benefits, Medicare or other big payments.

That scenario seems to be what Obama hinted in today’s speech. Wall Street would be happy and Main Street would hate it. We know Wall Street’s kingpins met with the president yesterday. Could he have told them his plan in an effort to calm the markets?

***

This afternoon someone fired shots outside the U.S. Capitol building. D.C. police and the Secret Service were chasing a car that had struck barricades near the White House. The Capitol complex went on lockdown and a police officer was injured.

The incident could be completely non-political, and although D.C. is a resilient city, tensions are already high and this news won’t help the situation. I hope everyone is safe.

***

In other breaking news, well, I’ll let Twitter tell you itself, in 124 characters …

We could see social-media/micro-blogging site make its stock-market debut as soon as November, under the symbol TWTR.

Although many reporters have been calling the service "new," the first tweet arrived in the world in 2006. Something that would be new, however, is profitability, but the company has big plans to raise $1 billion with its IPO. Goldman Sachs and Morgan Stanley are the underwriters, with Goldman taking the lead.

Interestingly, I saw a report recently that says Twitter’s fastest-growing user base is the 55 to 64 set. If you want a great crash-course on the future of mobile and the big part social networking is playing, you can see it here.

It may be young and not as well-capitalized as Facebook, and its CEO will only make $14,000 in salary this year. But it’s got a huge (78%) overseas user base and it’s turning around its lackluster cash-flow situation with increased ad sales.

There’s a lot to think about when considering an investment of any kind, but I think once Twitter debuts on the yet-to-be-named stock exchange, it might be one of those stories we’ll be talking about for years to come.

Perhaps via the Uncommon Wisdom Daily Twitter account!

***

Yesterday I asked for feedback on your personal expectations of Obamacare. Responses started to hit the inbox almost immediately and kept coming all night.

Several people from the United Kingdom wrote to take issue with the way Adrian S. described their healthcare system. (His letter is in my Wednesday issue.) This one is a good example.

Reader Andrew N. says: "As a UK citizen myself, I have to disagree with Adrian S. The National Health Service in the UK is a total mess. Because it is funded by taxpayers, users have no concept of the cost of healthcare and have totally unrealistic, yet rising, expectations.

"People attend a doctor’s surgery for the most trivial of reasons and medical practitioners hand out prescriptions for anything and everything. (There is a small charge for prescriptions.) As a result, the system is vastly overstretched and inefficient.

"There are long waits just to see a doctor, so many patients clog up hospital emergency rooms. I can state from personal experience that I am currently waiting 4 weeks to get a scan for a kidney stone. Would any American put up with that?

"Most people who can afford it buy private health insurance, which is very expensive and no longer tax-deductible, as it used to be for seniors. Seems to me Canada has got it right."

Brad: Thanks, Andrew. I think the lesson here is perspective. Everyone knows the healthcare system from his or her own experience. I have mixed reports from Canada as well.

***

Reader Daniel S. asks: "How much will a 21-year-old pay a year and what are the consequences if they can’t pay?"

Brad: This is a common question. The costs depend on more than just your age. To find out more, you have to go to the healthcare.gov website, and it is still overwhelmed. If anyone has actually gone through the process and picked a plan, please let me know what you found.

The consequences of not having health insurance are a little clearer. The penalty could be as little as $95 for next year, or nothing at all if you qualify for an exemption. Here is part of a Q-and-A from the Washington Post.

"What happens if I don’t get coverage?

"If you do not have the minimum level of coverage and do not qualify for an exemption, you must pay a penalty at the end of the tax year. The penalty for the first year is up to $95 per adult and $47.50 per child, or 1 percent of family income, whichever is greater.

"The fine, however, increases over time; in 2016, it will be as much as $695 per adult and $347 per child (up to $2,085 for a family) or 2.5 percent of family income, whichever is greater. The amount you owe will be prorated to reflect the number of months you were without coverage.

"Are there any exceptions to the mandate?

"Yes. People who cannot afford coverage because the cost of premiums exceed 8 percent of their household income or those whose household incomes are below the minimum threshold for filing a tax return are exempt. People with certain hardships, including those who would have been eligible for Medicaid under the health law’s more expansive rules but whose states chose not to expand their programs, also are exempt.

"Other exempt groups include prisoners, Native Americans eligible for care through the Indian Health Service, immigrants who are in the country illegally, people whose religion objects to having insurance coverage and individuals who experience a coverage gap of less than three consecutive months."

[Source: Washington Post, 9/30/2013]

I’ll share more letters tomorrow. I have some that are long and detailed. I will share more as I sort through them. Meanwhile, keep those letters coming.

***

If the government were still open, we would be anticipating tomorrow’s big employment report. Now we don’t know when to expect it. Meanwhile …

  • U.S. stock benchmarks retreated again as the parties stayed deadlocked. The S&P 500 was off as much as 1.4% intraday. It bounced back to close with a -0.9% decline.
  • Even with the bounce, this was the benchmark’s worst day since Aug. 27.
  • The Labor Department’s essential staff managed to release the weekly jobless claims report. It showed fewer Americans filing for unemployment benefits than economists expected.
  • Some good news from the Magic Kingdom: Walt Disney World is adding hours so part-time cast members can qualify for medical benefits. This is counter to the decision by other large employers to reduce hours to avoid benefit costs. Mickey Mouse is smiling.

Good luck and happy investing,

Brad Hoppmann

Publisher

Uncommon Wisdom Daily

P.S. James DiGeorgia’s and Geoff Garbacz’s Compound Gold trading system is on fire. In just the past month-and-a-half, they’ve opened 10 trades … eight of which are already closed out for a cumulative 266% in gains. See how you could start achieving similar results. Start here.

Your thoughts on “Economic Shutdown: Obama Plays his Trump Card”

  1. Sad to say but observing the administration and the leadership of the Democrat party it makes me wonder if a default is not what the president wants. If you have read “The Cloward Piven Strategy and Alinskys’s Rules for Radicals” it seems that The Presidents actions are in line with the tactics outlined by theses revolutionaries. Both argued for the transformation of the American government from a constitutional rule of law democracy to a Fascist Dictatorship in order to pursue social justice.

  2. The Canadian system benefited from the American system because any need for immediate medical care for most Canadians who could afford it or had to have care immediately the US is not far away (most live within 200 miles of the US). The downside for Canadians was that many of their docs immigrated to the US.

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