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Ask The Experts: What The Government Shutdown Means For Your Wallet

by John S Kiernan on October 8, 2013

government shutdownWhen the U.S, government shut down Oct. 1, many consumers outside the Beltway watched with only passing interest. After all, if you aren’t a federal worker or a government contractor, you aren’t really affected, right?

Not so fast. The shutdown could have far-reaching economic implications, according to the experts we consulted. So far, consumers have only been inconvenienced by closed museums and national parks. But the real impact could eventually hit consumers in the wallet.

While some estimates for the cost to the economy are as high as $300 million a day, Arthur Wheaton, Dir., Western N.Y. Labor and Environmental Programs at Cornell University, thinks that estimate is too low.

“I think the actual costs will be much higher and affect more people as the shutdown extends,” Wheaton said. “The National Parks system only impacts a relatively small number of employees. They do however impact many thousands of jobs that depend on the visitors for their income. That would include hotels, restaurants, souvenir vendors, gas stations, other area attractions, airlines and rental cars. If the shutdown lasts a week the effects will be minor to moderate. If the shutdown lasts weeks to months that will directly affect many thousands of people and millions, if not billions, of dollars.”

The Longer It Goes, the Worse It'll Be

The longer the shutdown goes on, the more far-reaching the impact will be, experts say. Small business owners, in particular, should expect to feel the heat.

“Small businesses -- particularly firms that rely on government contracting --will encounter a substantial crisis in their cash flow,” predicts Ted D. Zoller, an associate business professor at the University of North Carolina. “Small business owners should seek to reduce their cash burn and increase revenue from non-government sources as soon as possible. They should renegotiate payment terms to be more favorable and seek to collect any outstanding accounts receivable from non-government sources. In general, small business should attempt to insulate themselves from the risk of being too heavily reliant on government related revenue and diversify their revenue streams accordingly.”

Meanwhile, another potential fiscal crisis is looming in Washington. Congress must act by Oct. 17 to raise the debt ceiling or the U.S. could default on its debt. “Uncharted territory,” warns Silvia Allegretto, an economist at the University of California Berkeley. Steven Charles Kyle, associate professor of economics at Cornell, agrees.

‘Mother of All Credit Crunches’

“It would be hard to overestimate what an absolutely awful idea it is to use the threat of defaulting on Treasury bonds as a bargaining chip in any Congressional dispute,” Kyle said.  “Never in history has the country, which is the anchor of the world financial system, voluntarily reneged on debts that were contracted in good faith.  Nobody really knows what would happen because it is entirely unprecedented but it is a good bet that we would see the mother of all credit crunches.”

That, of course, would send the federal government’s borrowing costs soaring, making the debt even higher. It would also sock credit card users because higher rates on bonds would translate into higher credit card rates.

Welcome to Partisan Economics

The good news is House Speaker John Boehner has said he will not allow the U.S. government to default. But in the hyper-partisan world of Washington there is still worry that the unthinkable could somehow happen.

“Right now, the ideological gap between the President and the majority party in the House of Representatives is about as large as it has ever been. That makes it difficult to find a range of policies that are acceptable to both the President and the House majority,” says Justin Buchler, associate professor of political science at Case Western Reserve University. “What would it take for that to change? Possibility 1: a return to unified control of government. That way, the only party in power doesn't have to negotiate. Possibility 2: a total disaster that gets blamed on one party, forcing that party to adopt a new approach. Short of that, we're pretty much stuck with this.”

We can’t expect much change from the midterm elections either. “In order for the President's party to gain seats, something very unusual is required,” Buchler says. “In principle, a total economic collapse brought on by breaching the debt ceiling might do that, but it is unlikely that control of the House will change hands in 2014.”

Consumers should therefore be prepared. If you lack significant cash reserves and your job has been, or will be affected by the shutdown, it would be wise to act quickly to secure credit or a short-term loan.

Stocks Could Take a Hit

Finally, your stock portfolio could take a hit – at least on a short term basis – because of the shutdown. Stocks lost about 4% of their value during the 1995-96 shutdown, yet rose more than 10% the month after it ended. But as Kyle points out, during the last shutdown the economy was roaring.

“The shutdown then proved to be merely a hiccup while now the economy is in a much more fragile state,” he said.

It might not throw us back into recession but it could certainly bring the economy to a near standstill. So the bottom line – the government shutdown affects you and your wallet more than you think.

5 Tips for Shutdown-Proofing Your Wallet

The shutdown is expected to have a far-reaching economic impact, especially if it lasts for weeks rather than days.  Here are some strategies for preventing its many economic tentacles from stinging your wallet too badly:

  1. Maximize Your Emergency Fund:  The Great Recession taught us how important it is to have a financial safety net, even in times of prosperity, and the government shutdown will test how much we’ve really learned.  In other words, it’s a good idea for those of us who are not currently affected to cut back on spending and contribute as much as possible to a rainy day fund in order to better withstand market volatility and potentially rising costs moving forward.  You may not end up needing it, but if you ultimately do, you’ll be glad that you acted proactively.
  2. Apply for Additional Credit:  It takes a while to get a new credit card, so if you’re worried about your cash flow during the government shutdown, now is the time to apply.  The beauty of a line of credit is that it doesn’t cost you anything unless you use it.
  3. Open a Dialogue with Monthly Billers:  The government shutdown obviously isn’t business as usual, and much like financial institutions were willing to work with customers affected by Hurricane Sandy, many have already announced intentions to be flexible about due dates and finance charges during the unique circumstances we’re currently embroiled in.  At the very least, it can’t hurt to ask.
  4. Offset Investment Risk:  If you’re worried about the fate of your investment portfolio during the shutdown, keep in mind that there are ways to hedge your bets and not only retain your wealth, but perhaps even profit from the turmoil as well.  They may include further diversifying your assets, increasing your cash position, or buying stock on weakness in order to garner significant returns if and when depressed sectors ultimately bounce back.  But make sure to consult a financial advisor if you have any questions about the best approach for your needs.
  5. Fix Variable Rates:  It’s possible that credit card and loan rates will rise as we near Oct. 17 – the date by which the government must either extend the debt ceiling or default on its loans.  As a result, if you have a lot of debt tied up in variable rate loans and lines of credit, it’s worth looking into the possibility of consolidating as much of it as possible into fixed rate loans in order to garner debt stability amidst market turmoil.

Meet Our Experts

  • Mark C. Strazicich: Professor of Economics at Appalachian State University
  • Kim M. Downs: Associate Vice President for Student Financial Services at Middlebury College
  • Joao F. Gomes: Howard Butcher III Professor of Finance with The Wharton School of the University of Pennsylvania
  • Sylvia Allegretto: Research Economist and Co-Chair of the Center on Wage & Employement Dynamics at the University of California, Berkeley
  • Arthur Wheaton: Director of the Western NY Labor and Environmental Programs at Cornell University's ILR School
  • Steven Charles Kyle: Associate Professor in the Charles H. Dyson School of Applied Economics and Management at Cornell University
  • David Vladeck: Co-Director of the Institute for Public Representation at the Georgetown University Law Center
  • Ted Zoller: Director of the Center for Entrepreneurial Studies in the University of North Carolina's Kenan-Flagler Business School
  • Campbell R. Harvey: J. Paul Sticht Professor in International Business in Duke University's Fuqua School of Business
  • Bill Reichenstein: Pat and Thomas R. Powers Chair in Investment Management at Baylor University & Principal of Social Security Solutions, Inc.
  • Corinna E. Loeckenhoff: Assistant Professor of Human Development in the College of Human Ecology at Cornell University
  • David C. Colander: Christian A. Johnson Distinguished Professor of Economics at Middlebury College
  • Carolyn L. Craven: Visiting Assistant Professor of Economics at Middlebury College
  • Ailsa A. Roell: Professor of International and Public Affairs at Columbia University
  • Stephanie A. Kelton: Assistant Professor of Macroeconomics, Finance, and Money and Banking at the University of Missouri - Kansas City
  • Carol L. Osler: Program Director for the Lemberg Masters in International Economics and Finance at the Brandeis International Business School

Mark C. Strazicich - Appalachian State University

Mark StrazicichMany people seem to believe that if they don't work for the government, they won't be affected by the shutdown.  What do you think the ultimate impact on the average person's wallet will be?

Estimates of the cost of the current government shutdown to date are in the range of $1.6 - $2 billion. Estimates of the cost of the 27 day government
shutdown in 1995-1996 are $2.1 billion (in today’s dollars). However, I don’t expect much impact on the average person’s wallet from the recent government shutdown. While certain individuals and certain U.S. counties will be more heavily impacted by the shutdown, in general I do not expect much impact on the average person’s wallet. Of course, the longer the shutdown continues the more
noticeable and costly the impact will become.

How are things different for small business owners?  Are there any steps they can take to prevent the shutdown from putting their companies in jeopardy?

I expect that a significant number of small business owners will be negatively impacted by the government shutdown, but the impact will be localized. For example, hotel, restaurant, and other tourism related small businesses that depend on a steady flow of visitors to our National Parks will most likely have a significant loss in revenue during the shutdown. I am not sure what steps such businesses can take to prevent putting their companies in jeopardy other than to try to rebook customers for a future date and hope for a quick end to
the shutdown. Perhaps there may be some cases where small business owners can provide services that the National Parks or other government agencies previously provided while I expect that this possibility would not replace their previous revenue in many cases.

Is there reason to believe that credit card and loan rates will rise as Oct. 17 approaches?  Would this affect new loans and lines of credit, or also increase the cost of existing debt?  How would higher interest rates impact borrowing and the economy in general? 

In the past week many interest rates saw a small increase. However, to date there has been little upward movement in interest rates that coincide with the debt ceiling crisis. It appears that financial markets believe that politicians will avoid a debt ceiling crisis prior to Oct. 17. If a solution is not found and the Treasury is unable to meet its financial obligations then I expect that interest rates on federal government debt will begin to increase more significantly. If so, it is possible that this might reduce the demand for
other types of debt instruments throughout the U.S. and lead to higher interest rates throughout the economy. If interest rates rise throughout the economy than borrowing costs would go up for many types of new loans as well credit cards, which would be expected to dampen both business and consumer spending.

Is it too late for people to adjust their investment portfolios in the interest of mitigating the shutdown's effect on their wealth? 

I don’t think that people should rearrange their wealth portfolios to avoid any negative impact from the government shutdown. In terms of a possible failure to increase the debt ceiling, I expect that the outcome on wealth would be worse. If the Treasury can no longer meet its obligations due to a failure to increase the debt ceiling then I expect to see a negative impact on the stock market, bond prices, and the U.S. dollar. Since the stock market has yet not taken a major hit and bond yields have not increased much, I don’t think it is too late for investors to take action to reduce such risks if they want to do so. However, at this point I am still optimistic that Congress and the President will find a way to avoid such a crisis prior to Oct. 17.


Kim M. Downs-Burns - Middlebury College

middleburyWhat impact will the government shutdown have on student aid - both from a student and university perspective? Is there any concern that federal student aid funding could be cut in whatever debt resolution Congress ends up striking?

According to what we have been advised regarding the government shutdown, there would be minimal impact on schools, lenders, and guaranty agencies and their ability to administer Title IV Programs. While federal offices remain closed during a shutdown, the majority of Title IV processors, contact centers, and Web sites will remain operational. The Pell Grant and Federal Direct Student Loan programs are not funded by annual appropriations and are therefore exempt from the shutdown. There is the potential however for disruption to the flow of federal funds from their agencies to schools with the looming debt ceiling crisis(current students). With regard to prospective college students, one federal website - College Navigator is currently shutdown. This website is a one-stop shop for families who want to access admissions and financial aid data for thousands of schools.

We do not believe there is significant concern that federal student aid funding will be cut when a resolution is struck. The one area we have been advised on relates to sequestration changes as of October 1, 2013. The sequester increases the origination fees charged to Direct Loan borrowers beyond last year’s increases. Loan fees on Direct Loans where the first disbursement is made on or after December 1, 2013 will increase from 1.051 to 1.072 for Direct Subsidized and Unsubsidized Loans and from 4.204 to 4.288 for Direct PLUS Loans (both parent and graduate).

Instruments such as College Navigator, Net Price Calculators, and the federal shopping sheet are available for prospective students and afford the opportunity for more educated financial decisions when selecting an institution. Students should be aware of all (direct and indirect) costs at the institutions under consideration.
While we continue to urge the government to maintain student loan interest rates at a reasonable level and to increase the federal Pell grant, we recognize that it is the role of the Student Financial Services Office to continue to educate students and their families after they are on campus. Financial Literacy is critical.


Joao F. Gomes - University of Pennsylvania

Joao GomesMany people seem to believe that if they don't work for the government, they won't be affected by the shutdown.  What do you think the ultimate impact on the average person's wallet will be?

To a large extent that depends on the length of the shutdown. Provided that this is sorted out in two or three weeks, the overall macro economic impact should not be too large and it will almost surely take the form of deferring growth. It will slow us down in Q4 but we should recover most of it by early next year. Obviously some people will see their lives disrupted with this, but the numbers are unlikely to be very large.

How are things different for small business owners?  Are there any steps they can take to prevent the shutdown from putting their companies in jeopardy?

Realistically, there is very little that can be done now to minimize the effects of the shutdown on any business. For better or worse anyone whose business is closely tied to the closed braces of government will just have to make the best of a difficult situation.

Is there reason to believe that credit card and loan rates will rise as Oct. 17 approaches?  Would this affect new loans and lines of credit, or also increase the cost of existing debt?  How would higher interest rates impact borrowing and the economy in general? 

Probably not very much. These are still largely tied to short term Fed Funds and Libor rates which are tied to monetary policy and unlikely to move before the deadline.

Mortgage rates however might be more responsive if investor nervousness pushes long term bond yields higher.

Again the effect on the overall economy depends on how temporary this movement in rates turns out to be. A short spike lasting only a week or two is not going to have a lasting effect on the economy.

More significant could be the impact of increased uncertainty. For example in July and August of 2011 we saw a sharp decline in consumer confidence from which we took a long time to recover.

Is it too late for people to adjust their investment portfolios in the interest of mitigating the shutdown's effect on their wealth? 

Thus far the shutdown has had limit impact on financial markets. But there is definitely an opportunity to trade on the debt ceiling. As the deadline approaches it seems likely that risk premia will raise and there is a reasonable chance of a short term market correction.

However, investors taking the long view should probably just hold steady and ignore the (loud) background noise.

At the end of the day there will be a deal, the debt ceiling will be extended and the US economy will remain on target to grow close to 3% next year and to push unemployment below 7% for the first time in 7 years.


Sylvia A. Allegretto - University of California, Berkeley

Sylvia AllegrettoMany people seem to believe that if they don't work for the government, they won't be affected by the shutdown.  What do you think the ultimate impact on the average person's wallet will be? 

For the average person the shutdown will first be felt due to the unavailability of government services such as applying for a small business loan or new applicants for Social Security and Medicare-closed parks around the country including DC...the Smithsonian and the National Zoo. Many departments will shut down to some extent...financial regulators of the Commodity Futures Trading Commission, the EPA and the Department of Labor that enforces employment standards compliance, etc.

How are things different for small business owners?  Are there any steps they can take to prevent the shutdown from putting their companies in jeopardy? 

It really depends on how long this goes on and how much a business depends on government workers. If a business is located in DC, for instance, and has a large share of its customers who are no without work they would obviously be in a real bind without regular customers. Certainly around the country there are areas that will be more affected such as around national parks-many small towns and thus businesses around parks rely on visitors-who won't be there if the park isn't open. So, it is hard to gauge the total impact but as the days go by it will certainly grow proportionally bigger.

Is there reason to believe that credit card and loan rates will rise as Oct. 17 approaches?  Would this affect new loans and lines of credit, or also increase the cost of existing debt?  How would higher interest rates impact borrowing and the economy in general? 

I assume you refer to the debt ceiling...I'm not sure what will happen here...it certainly can't be good if the full credit of the U.S. comes into question. This is uncharted territory.

Is it too late for people to adjust their investment portfolios in the interest of mitigating the shutdown's effect on their wealth? 

I'm not sure what they would do at this point as the outcomes are in question. A few overarching points. There is no reason for any of this. The sequester has already been a drag on the economy in 2013. Additionally, there are 562,000 less government workers today than just prior to the Dec. 2007 start of what became the Great Recession. Debt levels have fallen considerable just by dint of the recovery…even as it has been pretty week for most of the last 4+ years. We are still 1.9 million jobs below where we were in 12/2007…so we have yet to make up the jobs lost and given we are into the 6th year of this so many millions entered or should have entered the workforce—thus we are down about 9-10 million jobs before we see the needle on unemployment somewhere around 5%--but we lost the focus on the jobs crisis in this country long ago and the shutdown and the looming debt ceiling will  do nothing to improve the plight of workers in this country and could possible cause even more unnecessary harm.

I should also add that of course it will be a hardship for workers many who are janitors, work in food services, landscaping, etc. who don’t get paid—well Congress continues to get paid.


Arthur C. Wheaton - Cornell University

Arthur WheatonMany people seem to believe that if they don't work for the government, they won't be affected by the shutdown.  What do you think the ultimate impact on the average person's wallet will be?

I think some of the estimates for the shutdown so far include a loss of $300 million per day. I think this estimate is too low and only takes into account direct loss of wages of federal employees.

I think the actual costs will be much higher and effect more people as the shutdown extends. The National Parks system only impacts a relatively small number of employees. They do however impact many thousands of jobs that depend on the visitors for their income. That would include hotels, restaurants, souvenir vendors, gas stations, other area attractions, airlines and rental cars. If the shutdown lasts a week the effects will be minor to moderate. If the shutdown lasts weeks to months that will directly affect many thousands of people and millions (if not billions) of dollars.

The national parks are simply one of the Federal programs being affected. Another critical and potentially life and death program is WIC. Women and Infant Children programs are being directly affected by the shutdown. The food banks are going to be under pressure to help fill in the gaps for those families with small children in dire need of food and supplies. Those impacted by the shutdown tend to be some of those least able to absorb the financial hit. A single lost check can have longer lasting effects. Most of those receiving WIC funds are barely getting by paycheck to paycheck. Any disruption can take much longer to recover from than those serving in Congress.

How are things different for small business owners?  Are there any steps they can take to prevent the shutdown from putting their companies in jeopardy?

Many small business owners are being affected by the shutdown. A relatively large number of contractors or part-time workers for the federal government are being affected. Only those essential employees are still working. Many of the small contractors (which are usually small business owners and consultants) are suddenly out of work. Worse yet, they have no idea what will happen next week. It is the uncertainty that causes more stress. If the shutdown lasts a week or two it will have a smaller impact than if it lasts for months. If they believe the shutdown will go on more than a week or two they are very likely to seek other employment opportunities and may not return to helping the federal agencies.

Is there reason to believe that credit card and loan rates will rise as Oct. 17 approaches? 

This is outside my area of expertise. My guess would be interest rates and credit card rates could rise but the uncertainty will certainly affect the stock market and global markets.

Would this affect new loans and lines of credit, or also increase the cost of existing debt?  How would higher interest rates impact borrowing and the economy in general?

This is also out of my expertise. My opinion would be if interests rates increase due to instability or a reduction in the US credit rating then costs of debt will increase. Higher interest rates have a direct impact on housing and auto sales two of the bigger drivers of our economy.

Is it too late for people to adjust their investment portfolios in the interest of mitigating the shutdown's effect on their wealth?

This is also out of my area of expertise. I think moving an investment portfolio for short-term problems is not wise. Trying to mitigate short term losses could lead to long term lower returns. Common thought is that you ahouls ride it out and keep a diversified portfolio. Reacting to short term crises in a panic leads to long term lower returns and potential losses.


Steven Charles Kyle - Cornell University

Steven Charles KyleMany people seem to believe that if they don't work for the government, they won't be affected by the shutdown.  What do you think the ultimate impact on the average person's wallet will be? 

If they don’t work for the government then they won't be immediately furloughed but neither will they be able to take advantage of any of the government services that those furloughed employees provided.  If this drags on for a long time the costs will build up and lets remember that the last time this happened in the 90's we were in the middle of the biggest economic boom in history. The shutdown then proved to be merely a hiccup while now the economy is in a much more fragile state.  I wouldn't predict that this negative shock (800,000 fewer paychecks getting spent in the national economy) will all by itself put us back into recession but it is definitely an additional drag on an already so-so economy.

How are things different for small business owners?  Are there any steps they can take to prevent the shutdown from putting their companies in jeopardy?

Those that depend directly on government business or sites like National Parks are really out of luck.  Others aren't going to feel much outside of areas where there is a large federal bureaucratic presence.  Those folks are likely to see a downturn in their business, at least a bit.  But if Congress authorizes back pay for furloughed workers as they did in the 90's there could well be a bounce-back when this is all over.

Is there reason to believe that credit card and loan rates will rise as Oct. 17 approaches?  Would this affect new loans and lines of credit, or also increase the cost of existing debt?  How would higher interest rates impact borrowing and the economy in general?

It would be hard to overestimate what an absolutely awful idea it is to use the threat of defaulting on Treasury bonds as a bargaining chip in any Congressional dispute.  Never in history has the country, which is the anchor of the world financial system, voluntarily reneged on debts that were contracted in good faith.  Nobody really knows what would happen because it is entirely unprecedented but it is a good bet that we would see the mother of all credit crunches. There is a good chance the credit system would freeze up and it is virtually guaranteed that interest rates on federal debt will be permanently higher.  That will cost us all money in the long run and will slow down the economy as well.  Since all interest rates in the economy (indeed the world) are affected by US Treasury rates, everyone who has an adjustable rate loan or who is in the market for any kind of a loan will feel the pain.

Is it too late for people to adjust their investment portfolios in the interest of mitigating the shutdown's effect on their wealth?

A lot of adjustment has already happened but no, it is not too late to, e.g. re-weight toward cash if you are worried about the risk of credit crunches or higher interest rates.  I get the impression that a Federal default is so unthinkable to those who understand the financial system that they really haven't wanted to take the threat seriously.  But we have to at this point given the obvious willingness of some in Congress to use this kind of brinksmanship to get what they want.


David Vladeck - Georgetown University Law Center

David VladeckDo you have any sense of whether the government shut-down will resolve to any significant kind of consumer protection issues like could people conceivably bring suit against the Federal government?

People can bring whatever suit they want. I mean, that suit would be immediately dismissed. You can't sue government for that which it is un-authorized to do. In fact it'd be a criminal violation to spend money that's not yet appropriated in order to keep the government working; there is the federal statute of the Antideficiency Act. So as frustrated as everybody is and everyone is frustrated; I'm sure Washington is not a happy place these days, suing a federal agency for doing something you can't possibly do doesn't strike me as a very productive thing to be doing.

It’s like assuming a double play in baseball?

It’s assuming a double play in baseball for a team that's not allowed to get on the field. I mean, it's worse than that. You know... no one in government wants to see this kind of shut-down. It cost the agencies a huge amount of money. On the other hand, they are obliged to do what Congress tells them to do and Congress is essentially telling them to turn a blind eye.

Everyone's hands are tied?

Yes, except for the House and one of the frustrations is that it's quite clear that if they brought to the floor a clean continual resolution, it would pass in a second. So it's frustrating.


Ted D. Zoller - University of North Carolina at Chapel Hill

Ted ZollerMany people seem to believe that if they don't work for the government, they won't be affected by the shutdown.  What do you think the ultimate impact on the average person's wallet will be?

The primary effect of a government shutdown is that paradoxically government will operate less efficiently and more money will be spent, which will translate into larger deficits, higher debt, and higher taxes. While many government services will be disrupted and people's lifestyles inconvenienced, the effect of federal workers being furloughed will create a general reduction in demand and consumption, which will result in a stagnant economy for all. Funds that flow through grants and transfers will virtually cease, resulting in an inability for several local and state governments to properly plan for their needs and for government contractors to predict their future cash flow. In general the effect of the shutdown will have negative bearing on the American economy and do significant damage.

How are things different for small business owners?  Are there any steps they can take to prevent the shutdown from putting their companies in jeopardy?

Small businesses -- particularly firms that rely on government contracting --will encounter a substantial crisis in their cash flow. Small business owners should seek to reduce their cash burn and increase revenue from non-government sources as soon as possible. They should renegotiate payment terms to be more favorable and seek to collect any outstanding accounts receivable from non-government sources. In general, small business should attempt to insulate themselves from the risk of  being too heavily reliant on government related revenue and diversify their revenue streams accordingly.

Is there reason to believe that credit card and loan rates will rise as Oct. 17 approaches?  Would this affect new loans and lines of credit, or also increase the cost of existing debt?  How would higher interest rates impact borrowing and the economy in general?

The effect of the shutdown will create uncertainty in the markets, which will likely have negative bearing on interest rates. Consumers who are now accustomed to low interest rates will immediately respond to this change and cease borrowing until favorable rates return. Business lines of credit may be tapped to deal with cash flow risk for the effects of the shutdown on the revenue top-line -- that for many businesses may result in potential insolvency. While the shutdown may be temporary, the effect on the markets may be more widespread than the actual duration of the shutdown.

Is it too late for people to adjust their investment portfolios in the interest of mitigating the shutdown's effect on their wealth?

Much of the answer to this question depends on how long the shutdown will persist. Although the market has responded immediately to the short range effects of the shutdown, -- diminishing the value of investments - if the shutdown continues, it could have substantial negative impact on the overall economic performance of the US economy and detrimental impact on portfolio values. Default on debt payments will exacerbate this trend resulting in a lack of confidence in government bonds and foreign investment.  All Americans should strive for an immediate resumption of government operations to return predictability and stability to the American economy.


Campbell R. Harvey - Duke University

Campbell HarveyWhat is your take-away from the drama that is unfolding in Washington?

This is not about the Affordable Care Act. This is not about the debt ceiling. This is all about risk. Do we have a government that can responsibly deal with their obligations both in the short-term and long-term? Right now, the answer seems to be no. And this equals risk. In a period of fledgling economic growth, unusually slow progress given that the recession started almost six years ago, the last thing that we need is increased uncertainty. Risk means that firms are hesitant to hire new employees. Risk means that companies decline spending on much-needed capital investment. In a time when the Federal Reserve feels obligated to inject over $1 trillion a year into the economy to support lower unemployment, the government's dysfunctionality takes us many steps back on the road to normal.

Is there a long term impact from the shutdown and default threat?

The markets have heavily discounted the political bluster. As long as the shutdown is focused on non-essential services, the short-term impact on the economy will be minimal. However, in the longer term, the credibility of the U.S. as an efficiently functioning safe haven has been damaged by the political theater.


Bill Reichenstein - Baylor University

Bill ReichensteinMany people seem to believe that if they don't work for the government, they won't be affected by the shutdown.  What do you think the ultimate impact on the average person's wallet will be?

For most people, like myself, the impact will be negligible. But some people will be affected significantly. Here in central Texas, Fort Hood and many of its employees are affected. For example, I know an engineer who tests military equipment at Fort Hood. He has been laid off indefinitely. However, if past patterns continue, he will be paid for missed labor. Then, again, this time may be different. He wants to work and is seeking odd jobs.

How are things different for small business owners?  Are there any steps they can take to prevent the shutdown from putting their companies in jeopardy?

No one can control the shutdown and its impact, if any, on their business. The shutdown is beyond their control.

Is there reason to believe that credit card and loan rates will rise as Oct. 17 approaches?  Would this affect new loans and lines of credit, or also increase the cost of existing debt?  How would higher interest rates impact borrowing and the economy in general?

In my opinion, there is no reason to believe a few weeks shutdown would impact borrowing rates at banks and credit unions or interest rates on credit cards. If this drags on long enough, yields on US Treasury debt could rise. Earlier this year I saw that long-term interest rates on Exxon Mobil bonds were lower than interest rates on comparable Treasury bonds. Since the US government has promised so much compared to its resources, this seems entirely rational to me. In the past two weeks, the cost of insuring against a default in the next year on Treasury debt rose significantly. It costs about €54,000 to insure against a default on €10 million in Treasury debt in the next year, which translates to an implied expected loss due to default of 0.54% based on the price of credit default swaps. (Credit default swaps are priced in euros since the dollar would likely fall if the government defaults on its debts.)

Is it too late for people to adjust their investment portfolios in the interest of mitigating the shutdown's effect on their wealth?

Everyone knew that 1) the government had no budget for this new fiscal year and 2) the government would hit the debt limit around October 17th. Prices already reflected this expectation. If, I repeat, if things turn out worse than expected with no compromise reached then markets will likely fall. But if Congress and the president can reach a compromise soon then markets will likely rise as this uncertainty is removed. Someone should only adjust their portfolio if they believe they are better than others at predicting whether things will be better or worse than expected. Eventually, we must address the deficit. All parties agree that deficit levels from recent years including this year are unsustainable.


Corinna E. Loeckenhoff Cornell University

Corinna LoeckenhoffMany people seem to believe that if they don't work for the government, they won't be affected by the shutdown.  What do you think the ultimate impact on the average person's wallet will be? 

Over the last two days, I was organizing a high-level conference with international experts on Aging, Health, and Emotion at Cornell Campus. A research expert from the National Institute on Aging was scheduled to speak at the conference and could not attend, limiting our ability to explore policy implications and prospects for long-term funding. Also, all funding portals for federal research agencies (National Institute of Health, National Science Foundation) are closed and new applications are not accepted.

So: No immediate impact on the wallet, but a long term impact on the research community that will ultimately translate in fewer jobs generated in research support and applied settings.


David C. Colander - Middlebury College

David ColanderMany people seem to believe that if they don't work for the government, they won't be affected by the shutdown.  What do you think the ultimate impact on the average person's wallet will be?

Effects of the shutdown will be spread out and spotty. The shutdown could have a minimal effect, but people will work hard to see that the effect is great--called the Washington Monument Syndrome.

Is there reason to believe that credit card and loan rates will rise as Oct. 17 approaches?  Would this affect new loans and lines of credit, or also increase the cost of existing debt?  How would higher interest rates impact borrowing and the economy in general?

As for the debt ceiling and 'so called' bankruptcy. If people really believed the US might go bankrupt, and not pay its debt, it would be catastrophic, but because it would be no one really believes that. So all the effects depend on how the politics play out--economic forces are far less important than political and psychological.

Is it too late for people to adjust their investment portfolios in the interest of mitigating the shutdown's effect on their wealth?

Yes, it is too late, but it is also too early since we will only know when it happens.


Carolyn L. Craven - Middlebury College

Carolyn CravenMany people seem to believe that if they don't work for the government, they won't be affected by the shutdown.  What do you think the ultimate impact on the average person's wallet will be?

The shutdown is an inconvenience for anyone using government services; it could wreck vacation plans; it is a major financial shock to federal employees who are not being paid. However, I don't think it's likely to have financial consequences for most people.

If the shutdown is not resolved by October 17 and a default on U.S. debt occurs, then I think most of us will feel the effects. Interest rates are likely to rise, borrowing will become more difficult, and it's possible a collapse in confidence will send the economy into recession. Job losses would follow.

I think most people in Congress recognize that a default could be devastating. Avoiding it is relatively simple, but there are mixed messages coming from Boehner.

Is there reason to believe that credit card and loan rates will rise as Oct. 17 approaches?  Would this affect new loans and lines of credit, or also increase the cost of existing debt?  How would higher interest rates impact borrowing and the economy in general?

Some bond interest rates are creeping up, which is likely to affect loan rates in a minor way. I doubt credit card rates will rise by October 17. They are pretty sticky. If the default actually occurs and interest rates spike, it will cause pain to any new borrower. Existing debt would only get more expensive if it is adjustable rate, which I don't think is very common for mortgages anymore. I don't know about the loans that small businesses are likely to have--it seems unlikely their interest rates float.

Is it too late for people to adjust their investment portfolios in the interest of mitigating the shutdown's effect on their wealth?

Stock prices are down modestly and some bond prices are down. If a default occurs, I'm sure they will both fall significantly. However, I don't think a default is likely. 'The market' doesn't think so either, apparently. It is less nervous than it was in 2011. The anxiety level is rising, though. If you are someone who feels a lot of stress about market fluctuations, maybe you should not have funds you need ready access to in the stock market--or in Treasuries at the moment. It might not be a bad idea to switch those funds into cash until the crisis is over.


Ailsa A. Roell - Columbia University

Ailsa RoellMany people seem to believe that if they don't work for the government, they won't be affected by the shutdown.  What do you think the ultimate impact on the average person's wallet will be?

Well there are a lot of people who depend on government services, like families who use Head Start and the medical-trial patients at NIH, who are affected directly just as government workers are. As for the indirect effects, it depends how long this will go on. In the short run, it is mostly service businesses (hotels, restaurants, etc.) in areas where furloughed government workers live and work (near major offices, national parks, etc.) that will see a loss of business. In the longer run, if this continues, there will be some major damage, as the lack government services such as food inspection for imports will affect the entire supply chain. At best of times, economists don’t always agree on the ‘fiscal multiplier’ – how government spending translates into increased output – but most agree that in recessions in particular, it is quite large. But I think the impact of the shutdown, if it persists, would be even larger because it is so unexpected and therefore there is a lot of waste and misallocation involved.

Is there reason to believe that credit card and loan rates will rise as Oct. 17 approaches?  Would this affect new loans and lines of credit, or also increase the cost of existing debt?  How would higher interest rates impact borrowing and the economy in general?

Politicians are quite responsive to the wishes of their Wall Street donors, who can’t be pleased by the prospect of a default; so I’m optimistic that the debt ceiling will be raised in time! The (threat of) default by the government would indeed be very disruptive – in the ways that you describe. In the longer term, the international status of the dollar as a reserve currency and a haven in times of stress would be compromised, and the US would lose some of its seignorage profit..

Is it too late for people to adjust their investment portfolios in the interest of mitigating the shutdown's effect on their wealth?

Yes, I don’t think there is much one can do at this point! It is hard to beat the market even in extreme situations like a government shutdown … On the other hand people who are directly affected by the shutdown may want to trim their equity and government bond exposures somewhat, and increase their cash holdings.


Stephanie A. Kelton - University of Missouri - Kansas City

Stephanie KeltonMany people seem to believe that if they don't work for the government, they won't be affected by the shutdown.  What do you think the ultimate impact on the average person's wallet will be? 

People who work for government and don't get paid don't shop, buy cars and houses, etc. as much as they otherwise would, causing the incomes of others to fall as well, who also then don't shop as much, etc.

How are things different for small business owners?  Are there any steps they can take to prevent the shutdown from putting their companies in jeopardy? 

They get hurt when their customers get hurt. There's not much they can do about it.

Is there reason to believe that credit card and loan rates will rise as Oct. 17 approaches?  Would this affect new loans and lines of credit, or also increase the cost of existing debt?  How would higher interest rates impact borrowing and the economy in general? 

No, the impact is from lower incomes.

Is it too late for people to adjust their investment portfolios in the interest of mitigating the shutdown's effect on their wealth? 

No. Markets don't believe it will happen, so there will be additional repricings if the shutdown continues.


Carol L. Osler - Brandeis University

Carol OslerMany people seem to believe that if they don't work for the government, they won't be affected by the shutdown.  What do you think the ultimate impact on the average person's wallet will be?

It depends on how long it goes on and how intractable the differences are. If they cut it off quickly, no effect on the average person's wallet. If it keeps up then businesses will lose (even more) confidence in the US government. That could mean less capital investment by businesses, which in turn means less job growth.

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John Kiernan is Senior Writer & Editor at Evolution Finance. He graduated from the University of Maryland with a BA in Journalism, a minor in Sport Commerce & Culture,…
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