The government has shut down – what now?

On October 1, hundreds of thousands of American federal workers will be furloughed. Following the failure of Congress to pass a working bill for President Barack Obama to sign, the U.S. government has shut down until further notice. This event has been a long time coming, and one might argue that since the 2010 midterm elections, House Republicans, Senate Democrats and the White House have been slowly but surely moving toward this inevitability.

The question now is when the stand-off will end. While it's difficult to speculate at this stage, there were hints of what could take place in the next few days behind the last acts on Capitol Hill late Monday night and early Tuesday morning. 

As the clock approached midnight, Senate Majority Leader Harry Reid of Nevada took the floor and declared, in no uncertain terms, that he would refuse to meet in conference over the continuing resolution (CR) that has been passing like a hot potato between the upper and lower chambers. He said this as it became clear this was going to be the next negotiating tactic of the House GOP leadership. Sure enough, after debate, the House passed a resolution calling for a conference meeting and appointing negotiators from both parties.

Shortly after passage, Speaker John Boehner of Ohio gave a very brief statement in support of the just-passed resolution. Reporters hastily called out questions and he seemed to respond in an exhausted manner, but turned and walked away with the rest of the leadership team. It didn't take a non-partisan perspective to see that Boehner, House Majority Leader Eric Cantor and the others look exhausted and defeated.

Why the sacrifice? Boehner and his leadership team hold a tenuous grasp over the wider Republican conference, in large part due to concessions made to the White House and Senate Republicans over prior funding initiatives. Some of the more hawkish members feel that the Speaker has failed to make inroads with the party's anti-Obamacare message, regardless of its merits, and this action could be a reflection of rising anti-leadership sentiment. It doesn't take a seasoned political scientist to see how a conference on this kind of trajectory could wind up in trouble, but the timing of it – with the debt-ceiling breach predicted for mid-October – actually makes sense when you look at the wider objectives of the House GOP.

In statement after statement, Tea Party-aligned Republicans have decried the idea of raising the debt ceiling, as it is anathema for those who believe that the United States debt load requires significant intervention on a dramatic scale. While this is true, Boehner and his more moderate leadership team understand the short-term – and likely long-term – ruin that such a move would create. The pathways for American government to reduce its debt burden are complex and a debt-ceiling breach could trigger a global credit crunch that would dwarf the 2008 Lehman Brothers collapse. Therefore, the Speaker may have traded a fight now for peace later – precisely when Congress will have face the risk of triggering interest rate surges that could quickly make government spending much more costly to finance.

Will the U.S. government shutdown end the world? No, but under the worst-case scenario – that Boehner has lost all control and is merely clinging to the gavel – House Republicans may hold both the government and the debt ceiling hostage. In that case, Democrats – including the White House – may be willing to sit back and push the blame for significant economic turbulence into conservative hands. Too many Americans would suffer harshly for the incapability of America's political class to compromise and govern. 

Investors should take steps to prepare for what may be coming. Investing in quality assets like cash flow real estate and stocking up on tradable commodities and precious metals like gold are a buffer against market volatility. Market movements in the next few days could be sudden and wide, so buckle down and prepare to take defensive positions. Stay with Great Wealth Strategies for more news and insights into this evolving situation.