Kerby Anderson

The nation has just endured the longest government shutdown in history. News stories focused on everything from flight delays to the interruption of SNAP payments.  As some parts of the government return to normal, there is a long-term economic impact of the government shutdown that very few are reporting.

Let’s go back to Halloween. On October 31, the Federal Reserve’s repo facility pushed out $29 billion in emergency loans overnight. That was the biggest spike since the 2020 financial crisis. The total for the first few days of November topped $125 billion.

The government shutdown was a major reason for this significant injection of liquidity. When 700,000 government employees are not getting paid, it has a secondary effect on the economy.

Our taxes (along with other sources of revenue) go into the Treasury General Account (known as the TGA). All that money flows through the system to pay bills and to pay government salaries. The money in the account has been skyrocketing.

Meanwhile, banks weren’t getting as much income because the government workers weren’t getting paid. That means mortgages weren’t being paid. Credit cards weren’t being paid. Car loans weren’t being paid.

Banks were starving for liquidity. Bank reserves were at their lowest level in over four years. That is why they needed an infusion of funds from the repo facility. But to fund this, the Federal Reserve needed to print more money (often referred to as quantitative easing).

The banks have cash and will soon have more as government workers receive their paychecks. What happens when all this cash comes crashing into the U.S. economy? You probably can guess. We will have all this cash chasing the same amount of goods. We have seen this picture before.