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US Shutdown comes at huge cost

Edward Rollett discusses the fallout from the US Government Shutdown

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Credit: asterix611
Credit: asterix611



As the US government shutdown continued into its third week, finance officials from across the world were unanimous in calling on Republicans and Democrats to come to a deal over the debt ceiling.

Christine Legarde, Managing Director of the IMF, warned that failure to come to an agreement would bring 'massive disruption the world over'. The government shutdown on 1 October was a result of the failure to pass a new budget.

This is not uncommon and usually continuing resolutions are passed to extend the funding. However, the Republicans were insistent that the Affordable Care Act, better known as Obamacare, was delayed or defunded in return for keeping the government open, which was rejected by the Democrats in the Senate and by President Obama. As a result, all non-essential staff were told not to come into work until a new budget was passed. This caused big problems for the economy, with Goldman Sachs predicting that a three week shutdown has reduced US growth by 0.9 per cent.

However, failure to agree to a new budget was only a small part of the problem. The US has a debt ceiling currently set at $16.699 trillion. This was reached in May and since then the Treasury has been using extraordinary measures to keep the government running.

At the current rate of spending, these measures would have run out of money on 17 October, were it not for an eleventh hour deal struck in the Senate last week. That funds the US government until 15 January, and suspends the debt limit until the 7 February. Reaching the limit is not uncommon - having been raised 77 times since 1962 - but the main issue in this deadlock is centred on Obamacare. Failure to solve this issue before the Treasury runs out of money could have been catastrophic, affecting the entire globe.

If the debt ceiling wasn't raised then a default would have occurred. In this situation, the government doesn't have enough money to meet its bills and has to stop paying some of them. Bond holders would most likely be the first to take a hit, with the interest on debts going unpaid.

What would happen as a result is mostly unknown, but the value of the bonds would fall and the yield on them would rise.

This would cause a fall in the world stock markets and a rise in interest rates which are often linked to US bonds. The rise in interest rates would make it more expensive for consumers to borrow, reducing economic growth as consumers spend less.

That could have pushed the world back into recession, a daunting prospect.

Regardless of what happens in the future, though, for now at least the entire globe can breathe a collective sigh of relief.

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