Q: How will it affect the economy if the Federal government shuts down because of the budget disagreement, and specifically, will this be good or bad for interest rates on savings accounts? They seem so low that nothing could hurt them, but I'm a big believer in Murphy's Law.
A: If a government shutdown lasts more than a week or so, your belief in Murphy's Law will be justified. A sustained government shutdown seems likely to have a negative economic effect, and one that would be especially bad for savings accounts, as well as other interest-bearing deposits such as CDs and money market accounts.
Even without a government shutdown, an emerging theme in the economy lately has been developments which threaten to slow economic growth while adding to inflation pressure. The unrest in the Middle East and the disasters in Japan fall into this category, and it is a worst-of-both-worlds scenario for CD, savings, and money market rates. A government shutdown would be more of the same.
The drag on growth would come as a result of suspending pay for hundreds of thousands of Federal workers, and postponing a variety of Federal contracts. The inflation impact would come from the inevitable supply chain disruptions that would result from Federal officials not being available, or operating with minimal resources.
Add this up, and you have two negatives for savings accounts and other deposits, which is why it seems a government shutdown would contribute to the worst-of-both-worlds environment that seems to be taking over. Interest rates on savings accounts and other deposits have been low because of the sluggish economy, and a government shutdown would slow the economy further. Meanwhile, inflationary supply-chain disruptions would increase the inflation pinch, which is bad enough already with savings account rates badly trailing the inflation rate.
Bottom line: you may not miss the government until it's gone, but you will miss it.
Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to the "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.