Why the US government shutdown will lead to a new infrastructure boom
US political events often, and unfairly, dominate local headlines.
Even in the midst of our own political turmoil, the antics of our much bigger and naughtier brother often make front-page news more than our own local issues.
Take the recent partial ‘shutdown’ of the US government only days before Christmas last year.
As many of us were mentally switching off for the year, the US government seized up…and the US stock market tanked as a result.
The Dow Jones dropped almost 8% in four days. This dragged our own S&P/ASX 200 some 2.5% lower, just as we were all about to wrap up for Christmas.
What if there was some good to come out of all of this?
And no, I don’t mean the wall Trump is pushing for.
But what if, behind all the drama, there’s a one-trillion-dollar economic transformation package?
Behind all the white noise of the political standoff is an infrastructure legalisation bill, says Jim Rickards below.
While the partial shutdown over the wall still has a little longer to play out, Jim says there could be a massive cash splash on vote-winning public projects.
In fact, it could very well transform the US economy in the short term. One trillion dollars buys an awful lot of labour and steel.
And, it’s the sort of spending program that both political sides will like. More local employment for one side…and an increase in buying of US manufactured industrial products.
As Jim says today, look beyond the US political gridlock to see what is really going on.
There could be a massive infrastructure boom ahead for the US market this year…
But before I hand you over to Jim today, here’s a free video I made for you. In it, I reveal my three key themes for Aussie investors in 2019.
Until next time,
How long will the US government shutdown last?
Jim Rickards, Strategist
Remember the Tea Party revolt in 2009–2010 against government bailouts and government spending?
Remember the ‘fiscal cliff’ drama of 31 December 2012, when US Congress raised taxes and cut spending to avoid a debt default and government shutdown?
Remember the actual government shutdown in October 2013 as Republicans held the line against more government spending?
Well, congratulations if you do, because everyone else seems to have forgotten.
The days of caring about debt and deficits are over…
Spending money they don’t have
Republicans passed the Trump tax cuts that will increase the deficit by US$1.5 trillion on a conservative estimate, and probably much more.
Then Republicans and Democrats ‘compromised’ on eliminating caps on defence spending and domestic spending by agreeing to more of both.
That repeal of the so-called ‘sequester’ will add over US$300 billion to the deficit over the next two years.
Then there’s a tsunami of student loan debts in default that the US Treasury has guaranteed and will have to pay off.
Finally, the higher interest rates from this debt will add US$210 billion to the annual deficit for every 1% increase in average federal debt funding costs.
Today, the US is looking at US$1 trillion-plus deficits as far as the eye can see.
That’s extraordinarily enough.
What is more extraordinary is that no one cares! Democrats, Republicans, the White House and everyday Americans are all united in totally ignoring the fact that America is going broke.
This euphoric mood in response to more spending won’t last.
Turning a blind eye to debt
The growth is not there to pay for the tax cuts, and the US economy is not even growing fast enough to keep up with the growth in the debt.
Credit rating agencies are preparing reviews that will likely lead to a downgrade in the US credit rating and higher interest costs for the US Treasury.
When the crisis of confidence in the US dollar and related inflation arrive, there will be no particular party to blame.
The entire system is turning a blind eye to debt, and the entire system will have to bear some part of the blame.
We have a highly dysfunctional political system, with plenty of blame to go around.
Each US fiscal year (1 October to 30 September), the government must be funded either through individual appropriations bills for separate departments and agencies or through ‘omnibus’ legislation that funds multiple agencies with one gigantic bill, which very few members of Congress actually read.
Any failure to pass an appropriation bill or omnibus bill on time results in the affected agency or the entire government shutting down, at least with respect to ‘nonessential’ personnel.
If a deadline is going to be missed, the Congress can pass a ‘continuing resolution’, or CR, which keeps the government open using the prior year’s spending levels until the new appropriation can be worked out.
Eventually the appropriations bills must be passed, which is why they are the one vehicle where some bipartisan cooperation is needed.
President Trump has insisted that over US$5 billion be apportioned to fund the border wall that he promised during his campaign.
Last year, Trump suffered a political defeat when he didn’t get his funding. This year he seems determined to get it.
The House has actually passed a spending bill that allocates US$5.7 billion for the wall.
But it has to pass the Senate in order to go ahead. Senate Minority Leader Chuck Schumer has insisted that it wouldn’t get through the Senate.
But Trump insists he won’t sign the bill unless it includes funding for the wall, and he says he’s prepared to let the government shut down: ‘If the Dems vote no, there will be a shutdown that will last for a very long time.’
No deal was reached and now the US government has partially shut down.
You might not remember, but the US government actually shut down for two days back in January 2018.
Before that, the last shutdown occurred in 2013. That shutdown lasted 16 days.
How to keep the US open for business
But despite pervasive political dysfunction in Washington, DC, there is one important piece of legislation that I expect to achieve bipartisan support in the coming months…
This legislation would be a one-trillion-dollar infrastructure spending bill that would extend its spending to all 50 states.
Both parties agree that enormous improvements are needed in highways, bridges, airports, railroads and public amenities.
Democrats like infrastructure spending because most of the jobs created are union jobs that offer relatively high pay and benefits.
Republicans like infrastructure spending because the suppliers include firms that provide steel, heavy equipment, cement, asphalt and the technology behind the operating systems.
Both parties like infrastructure spending because it’s popular with voters and results in tangible progress, unlike the intangible benefit programs that voters can’t see.
The Democrats can support ‘jobs, jobs, jobs’ while the White House can say it’s out to ‘Make America Great Again’.
It’s a win-win for the two parties and the voters.
New bull market?
Of course, a bill of this type will add one trillion dollars to the deficit.
But at least politicians could claim that the benefits to the economy — in terms of wages, equipment sales, safer highways and airports, and reduced travel times — will outweigh the added deficits. In other words, they can claim the new infrastructure will produce added growth for the economy.
Best of all, the infrastructure spending would be ‘made in America’.
These are not the kinds of projects that can be outsourced to Mexico or China.
The projects would use US steel, US equipment and US workers. At a time when the US political process is breaking down into acrimony and accusation, both parties might like a bill that benefits the country and makes the politicians look reasonable.
Funding the Department of Transportation, which oversees infrastructure spending, could be the catalyst for companies that provide materials for structural improvements to the nation’s highways and bridges.
This spending spree may bring a second wind into the US market. Savvy investors should take note.
All the best,