Bonds, Stocks In US Drop Over 2013 Government Shutdown Fears, Worse As 2007

Bonds and stocks are dropping with global investors fearing the 2013 government shutdown fallout.

As previously reported by The Inquisitr, the recent government shutdown history shows that both sides of Congress failed to reconcile any solution to the debt ceiling.

A new Silvio Berlusconi scandal has left the Italian government almost non-functional this morning after Berlusconi fired all of the prime ministers in Italy. Investors now have a “a sense that things are now spinning out of control.” Since the fate of European countries are tied together with the Euro and other agreements, the crisis in Italy has caused European bonds and stock markets to drop as well.

This Italian crisis happens to coincide with the day before the 2013 government shutdown, shaking international confidence even further. 54 large investors from the United States, Europe and Japan cut allocation to US stocks to a four-month low of 41.7 percent, down from 42.9 percent in August.

US monetary policy as defined by the Federal Reserve also plays a large part in fears over US bonds. The Federal stimulus program, quantitative easing (QE), has continued unabated for several years now. The effect of a two-week government shutdown on 4th quarter United States GDP growth is projected to be 0.3 percentage points, which has international investors dropping US bonds even quicker.

The debt ceiling is essentially an artificial barrier created in 1917 that limits the Federal government in issuing new US bonds, which is the principle way the Federal government borrows money. Because of the government shutdown, US bonds and equity holdings have hit the lowest point seen since April 2007, which was the time frame in which the US Great Recession was triggered.

But the debt ceiling does not control or limit the ability of the federal government to run deficits or incur further debt. Rather, it is a limit on the ability to pay back obligations on debts already incurred, so the government shutdown could cause US bonds interest rates to rise sharply because of the uncertainty. Because of this, if the debt ceiling is not raised the United States credit rating could fall and devalue the US dollar, which would cause some investors to stay away from US bonds.