Political Risk Update: France and the U.S. Budget

Unsurprisingly, financial markets have rallied, not just on the election outcome but on what it implies for the future. Although populist parties continue to pose a threat to the system in other countries, the French result shows that trend may have peaked. At this point, it looks like more of the same is the most probable path for Europe.

This certainly doesn't eliminate the risks—the same problems that have brought Le Pen and other populists this far have not gone away—but it does kick them further down the road. With economic growth trending up and unemployment trending down, it at the very least buys time, which is what Europe needs. Right now, the political risks appear to be subsiding.

In U.S., government shutdown looms

Here in the U.S., passing a budget is the next hurdle the government has to surmount. Although negotiations between the parties, and between the House and Senate, have reportedly been going well, several major sticking points remain. Plus, the White House recently introduced funding for a Mexican wall as another major issue. Though it’s likely a deal will be reached, there’s also a real possibility of a government shutdown as soon as this weekend. Passing a budget is hard, and there are only four days left.

A shutdown isn’t as bad as it sounds, as much of the government will continue operating on autopilot. Although the consequences will be perceptible and real, a government shutdown certainly isn’t the end of the world. We have ridden out several in the past, and this one isn't likely to be worse than the others.

At the same time, however, this does raise the stakes for a future issue: the debt ceiling. The consequences of a government shutdown are manageable, especially if it is short, but the consequences of failing to raise the debt ceiling could be much more serious.

The next hurdle: debt ceiling

Right now, we are at the debt ceiling—that is, the U.S. government cannot legally borrow any more money. The Treasury is using the “usual emergency measures” to pay the bills, raiding other sources of cash such as federal pension funds, targeting various pools of money used for different government programs, looking for change under couch cushions . . . pretty much everything it can do. Despite these efforts, the government will run out of cash toward the middle of the summer. At that point, the risks rise substantially.

Then, the question becomes, who gets paid? Do social security recipients get their checks, or does the U.S. default on its debt? Or can we not even prioritize payments, so some recipients don’t get paid, but we have no control over that? Right now, the third option is most likely, although work to rectify the matter is reportedly under way. We might end up defaulting on the debt, stiffing some social security recipients, and shutting down the government in late summer.

The consequences of any of these outcomes would be substantial and warrant further discussion. As (and if) we get closer to that point, we’ll spend much more time walking through them. For the moment, it’s simply worth noting that the budget negotiations this week will be consequential, not only on their own account but as an indicator of what’s to come with the debt ceiling.

Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by Brad McMillan. Forward-looking statements are based on our reasonable expectations and are not guaranteed. Diversification does not assure a profit or protect against loss in declining markets. There is no guarantee that any objective or goal will be achieved. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance is not indicative of future results.

© Commonwealth Financial Network

© Commonwealth Financial Network

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