Monday, June 27, 2011

The Washington Uncertainty Situation

Consider this fact pattern: you are currently a business owner thinking about either hiring someone or taking out a loan. As part of this process, you think about political events over the next few months and see the following:

1.) Washington allows the debt ceiling debate to expire. As a result, US Treasuries sell-off, yields spike and the entire yield curve is thrown off. This of course increases the cost of your capital and makes the possibility of closing a loan nearly impossible. If you are looking at hiring a new person, you see this scenario as one that halts any forward economic momentum, meaning an already weak aggregate demand situation becomes weaker, making hiring someone a low priority.

2.) Washington solves the debate issue. In doing so they negotiate huge spending cuts. This lowers GDP growth (remember, government spending is a variable in the GDP equation). As such, this deal also hurts your company in the medium term, thereby lowering the possibility of taking out a loan or hiring somebody.

Here's the point of the above scenario: no matter what Washington does right now, all possible, publicly floated program options will lower overall growth. That means Washington is clearly a problem, creating a large amount of macro-level uncertainty that is in turn freezing action.