The government shutdown and overall indecision by leadership in Washington, D.C., is mentally bankrupting many businesses, consumers and the general public. Mental bankruptcy may be too abrupt of a term; however, it is impacting the economic growth of the United States and, to some extent, the world economy. Approximately 80% of all economic decisions are based upon emotional behavior. The indecision and lack of leadership by all parties concerned in Washington, D.C., has put American businesses and consumers on hold.
Business investment decisions are being postponed or canceled because many do not have a clear path or direction. Households are deleveraging and postponing major investment decisions. Unemployment remains stubbornly high because businesses are employing part time and contract workers due to the uncertainty in healthcare provisions, tax policy and overall regulation. Businesses are stashing cash and, to some extent, lending institutions are very conservative in extending loans in this uncertain environment.
One can really see the indecision that the American political leadership has caused in inflation data. Despite the Federal Reserve’s accommodative strategy of bond purchases and printing money, core and headline inflation have been benign. This is in part the result of the velocity of money, which is the number of times money turns over in the overall economy. Cash held in reserves is not being spent and conservative spending habits are not a stimulus to the U.S. economy, especially since 70% of the U.S. economy is consumer or service-based.
The deal in Washington, D.C., is only temporary and will be played out again after the first of the year on radio and television talk shows. This continued uncertainty will be a drag on the economy, perhaps affecting fourth quarter GDP as much as one third to 1%, and possibly carrying over until next year. A political system that appears to be broken is having a definite impact on the U.S. economy and its overall world economic status.
In the meantime, how do we manage around these issues with the lack of a clear path established by Washington, D.C.? Maintaining a reasonable amount of debt and a high level of liquid financial assets, both business and household, may be the recipe to circumvent mental bankruptcy.