Gaetz Says 'Few Days' Of Government Shutdown Worth Staving Off 'America's Financial Ruin'

Barring some sort of miracle from Congress, the government will technically shut down on Saturday at midnight after House Speaker Kevin McCarthy and the House Freedom Caucus failed to arrive at consensus for a 30-day stopgap known as a Continuing Resolution (CR) - despite a promise from McCarthy last week to remove roughly $300 million for Ukraine aid (on which he later reversed course).

"It became too difficult to do that, so we’re leaving it in," McCarthy said - signaling virtue over the bill he knew had no chance of passing at this point.

Bring it...

Rep. Matt Gaetz (R-FL), a key Republican holdout on the CR, says he's ready for a multiday US government shutdown if it means that demands such as conservative border policies are inserted into the eventual package.

If the departments of Labor and Education "have to shut down for a few days as we get their appropriations in line, that’s certainly not something that is optimal," Gaetz told Fox News's "Sunday Morning Futures," adding "But I think it’s better than continuing on the current path we are to America’s financial ruin."

"I want to fund the government. I'm not pro-shutdown," Gaetz continued. "But the way to fund the government is the same way we've been doing it since the mid-90s where it's one up or down vote on the entire government all at once."

That said, House Republicans are expected to move forward on four appropriations bills this week - though Congress is now set to miss its quickly approaching month-end budget deadline, while Republicans are also considering a different stopgap measure which would fund the US government for between 14 and 60 days.

Prior to Gaetz, Rep. Jim Jordan (R-OH) appeared on the show, where he said that in principle "everyone wants to get the 12 appropriation bills done," but "frankly, we’re not going to get it done in the next six days."

"So there’s going to have to be some stopgap measure," Jordan continued, adding that Republicans would have to "win something" in passing the CR.

Democrats such as House Minority Leader Hakeem Jeffries have repeatedly portrayed Republicans as holding the federal government hostage with a “civil war” of infighting between House factions. President Joe Biden renewed his call for Republicans to “get this done” in a speech at a Congressional Black Caucus event Saturday evening.

Conservative hardliners have been a sore spot for House Speaker Kevin McCarthy, who’s caught between appeasing the far right and catering to more moderate members of the House while relying on a single-digit Republican majority. -Bloomberg

On Sunday, Morgan Stanley broke down the impacts of a short-term (or longer) shutdown scenario...

1. Government shutdown risk is real: Why? We could write thousands of words on the fiscal negotiating positions of different groups in Congress and their underlying motives, but let’s just leave it at this: The House Republican majority is struggling to reach internal consensus on both the level and makeup of the spending it supports. Further, it appears that whatever consensus it reaches will differ substantially from the bipartisan Senate consensus. And time is running short to bridge that gap. Hence, a shutdown and the resulting political pressure on elected officials from unhappy constituents may be the only path to compromise.

2. By itself, our economists size a shutdown impact on GDP as modest UNLESS it lasts more than a few weeks...an uncommon occurrence: Shutdowns typically last a few days, sometimes a few weeks. We’ve little reason to expect this time to be different. Historically, shutdowns tend to end when the economic risk (and hence the perceived political risk) gets real. Consider the 35-day shutdown under President Trump. The compromise that ended it came quickly after an air traffic stoppage at New York’s LaGuardia Airport, when 10 air traffic controllers who weren’t being paid failed to show up for work. In a similar situation, our economists expect the loss of consumption from deferred government salaries and other spending to reduce GDP by 0.05% for each week of shutdown, with a more muted impact if workers receive back pay when the shutdown ends.

BUT...an extended shutdown could amplify the risks: Lacking income for a longer period may change the consumption patterns of the unemployed. What’s more, the longer the shutdown, the greater the risk that government contract payments get deferred (e.g., payments to vendors for doing work like paving roads), upping the economic impact. The Council of Economic Advisers estimates that under those conditions, the GDP downside rises to 0.13% per week.

3. Still...it could create fresh pressure on markets to price in a slower US growth trajectory, limiting a further rise in US treasury yields: Although the shutdown’s economic effect could be modest, its timing may remind investors of other factors our economists have flagged that likely drive a slowdown into 4Q. In particular, the surprisingly large one-time effects of key summer events go away and the student loan repayment moratorium ends, likely directing some household income away from consumption...

Bottom line – a US government shutdown alone is unlikely to weaken growth but clearly could remind investors of other more powerful growth headwinds, supporting our broad preference for bonds over equities.