What is US Government
Shutdown?
A US
government shutdown is the inability of the US federal government to provide
public services, to meet its debt obligations and to run various government
departments smoothly. The US
government is facing a possible shutdown by 1st October technically.
But the real shutdown may take place after 17th October as indicated
by the US
treasury secretary Jacob Lew. The full faith and credit of the US government
would be in peril.
The US federal government needs money
to meet its obligations—such as social security benefits, military salaries,
interest and principal payments, tax refunds and others. The money is made
available through the budget approved by the US Congress—consisting of Senate
and House of Representatives. If funds are not available, the government comes
to a grinding halt. So, why is the US in such a mess?
Reasons behind the fund
crunch:
The reasons are both
political and economic. The Republican and Democratic party members are
sparring in the US Congress over increasing the federal government’s debt
ceiling. The Republicans want president Barack Obama to postpone his Obamacare
by one year and some legislative action on tax and environment matters.
Obamacare, which is effective 1st October, is shortened form of
Affordable Care Act. It provides health care benefits to US citizens. The
Republican proposals are shot down by the Democrats and the president; and the
standoff continues at present. With majority members belonging to Republican
party, the House of Representatives is controlled by it. But the Senate is controlled
by the Democrats.
In fact, the acrimony between
the two parties has been going on for the past three years. In 2011, the US government
almost came to a standstill, but was averted at the last minute. Under
president Bill Clinton’s regime, the US government experienced shutdown
intermittently for about four weeks between November 1995 and January 1996.
For more than two decades,
the US
has been living beyond its means. It has been unable to balance its
budgets—with expenditure being more than its revenues. The US consumption has been a boon to exporting
countries, such as, China , Japan and Germany . In turn, several non-US
countries invest in US Treasury securities, helping bridge the US budget
deficits for a long time. But in the aftermath of the 2007/2008 global
financial crisis, the tepid US
economic growth has further worsened the US budget deficits.
What is debt ceiling?
Debt ceiling is the total
amount of money the US
federal government is authorized to borrow to meet its existing legal commitments.
The US Congress is in the habit of raising debt limits regularly. In fact, the
ceiling has been raised 78 times since 1960. In the following weeks, Congress
leaders of both parties have to agree to raise the debt ceiling and make it
into law, failing which the US
government has to shut down.
The
US
deficit cannot go beyond the debt ceiling approved earlier by the US Congress.
The US
federal government has to spend within the debt ceiling set by the US Congress.
The money is needed to pay nation’s expenses and borrowings. Before 1st
October, there has to be an agreement in the US Congress between the two
parties.
The current federal borrowing
limit is $16.7 trillion—the total public debt outstanding has already reached
this limit. The Republicans are refusing to enhance this limit, resulting in
the current deadlock on Capitol Hill. Five years back, the total outstanding
debt was $10 trillion, which has gone up by a whopping 67 percent in the last
five years!
What is the impact?
Public services will be
adversely impacted if the government shuts down. Parks and museums would be
closed. No passports would be issued as passport offices would be closed. Many
other non-essential public services too would be closed. But postal workers and
food inspectors would work. Social security benefits, such as unemployment
benefits and old-age/insurance benefits, too will continue to be paid as usual.
Borrowing costs for the federal government would go up. Home values of the
Americans would fall.
The possible shutdown may
lead to a financial crisis threatening jobs and savings in the US . This may
jeopardize US
economic growth in particular and world growth in general. Failing to increase
the debt limit would result in unimaginable consequences. Not paying debt
obligations amounts to US
default and this has not happened in recent history (Detroit
city in the US
filed for bankruptcy in July this year).
Financial markets seem to
have ignored the shutdown impact for the time being. They may be basking in the
positive news of the US Fed deferring its tapering decision. The markets would
soon realize the ripple effects of the shutdown and may react violently
depending on the outcomes from the US Congress.
What is the way-out?
There are some proposals on table, such
as bringing a temporary funding bill and prioritizing the payment of
obligations. At the time of writing this post, the discord over the budget
remains. It is hoped better sense would prevail between the sparring parties.
Nobody is sure how the impasse can be resolved in the next few days, if not
weeks.
To Sum Up:
If the shutdown is only for a few days,
the impact may not be material. But if it is prolonged it will have huge
negative effects, not only on the US economy but also across global
financial markets, which are basically US-centric.
The US
has been unable to balance its budget, but the world is still willing to pour
money into the US
thinking that the country would never default. Rampant government borrowing has
resulted in an ocean of debt for the US .
Investors such as Jim Rogers and Marc
Faber are highly critical of the US government’s efforts to flood
the world with US dollars or fiat money. They have been arguing that the US has to
implode at some point of time. The ongoing bitter fight on Capitol Hill has
damaged the credibility of the US
in the eyes of the world and if better sense does not prevail on the US lawmakers,
it will lead to some tectonic movements across the globe. Investors are to
brace themselves for increased volatility in the markets in the next one month
until a settlement is in sight.
Related: US
Fed tapering postponed 19Sep2013
- - -
References: www.treasury.gov, www.treasurydirect.gov
Picture: Capital Hill
Building . Washington DC .
Courtesy: www.aoc.gov
Disclaimer: The author is an investment
analyst, equity investor and freelance writer. This write-up is for information
purposes only and should not be taken as investment advice. Investors are
advised to consult their financial advisor before taking any investment
decisions. He blogs at:
Connect with him on twitter @vrk100
In the event of a US government shutdown, all the buildings of US Library of Congress will be closed to public--including their websites.
ReplyDeleteAs the US Congress failed to agree to a new budget, partial shutdown of US government started on 1 October 2013.
ReplyDeleteThe Republicans are insisting on the repeal or delay the implementation of Obamacare or The Affordable Care Act. But the Democrats and the President are not agreeing for that. So the deadlock on Capital Hill continues and the US government shutdown has started.
ReplyDeleteAs expected, the US Congress (on Capital Hill) on the night of 30Sep2013 failed to agree to a new budget for 2013-14. (The US financial year starts on 1st October and ends on 30th September). As such, partial shutdown of US government's non-essential services started on 1st October.
ReplyDeleteThe US government shutdown which began on 1st October and the debt ceiling limit are two separate issues. The stalemate between the Republicans and the Democrats in the US Congress is likely to affect the proposal to raise the debt ceiling limit of $16.7 trillion. The debt ceiling is expected to reach its limit on 17th October. Before that, both parties must agree to raise the current debt ceiling limit. Otherwise, the US federal government will be left with no money to spend and it's quite possible that the US will default on its debt obligations.
ReplyDeletePresident Obama held talks with Congressional leaders on 2nd October but they couldn't reach any agreement. So, the log jam continues in Washington, DC, over the US government shutdown and raising the debt ceiling limit.