The US Shutdown

The latest news, be it whether you read from it in BBC or 9gag, (cmon most of you guys read about it in 9gag) is that the US government has shutdown. So what implications does that bring?

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For a ‘not-so-informative’ discussion, check out this link below

The US Shutdown, explained

Now, a more detailed explanation on the shutdown itself, taken from the Guardian,

Please explain what just happened

The US government has begun shutting its non-essential services. Hundreds of thousands of workers are waking up to the news that they are on unpaid leave, and they don’t know how long it will last. The shutdown, triggered at midnight Washington time 1st October, will bring a range of services to a standstill across the world’s largest economy.

Why?

The Federal government had no choice. The US financial year ended on 30 September, and politicians on Capitol Hill have failed to agree a new budget for the 2013-2014 financial year. Even a ‘stopgap’ funding deal proved beyond them. Without a budget deal approved by both parts of Congress, the House of Representative and the Senate, there’s no legal agreement to pay non-essential staff.

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Weren’t they supposed to fix this last night?

They tried. A series of proposals rattled between the two sides on Monday night until midnight struck without a deal.

Why couldn’t they agree a deal?

Under the US constitution, the president cannot unilaterally bring in legislation. And despite weeks of talks, Republicans continue to include cuts and delays to Barack Obama’s Affordable Care Act in the budget legislation they sent up to the Senate.

The House of Representatives is controlled by the Republican Party, whose Tea Party movement remain deeply opposed to Obamacare. They tried to use the budget as leverage to crowbar changes to the Act. The Senate, which is under the control of Obama’s Democrats, has stood firm.

Will the shutdown mean the entire US government grinds to a halt?

No, it’s not an anarchist’s (or libertarian’s?) dream. Essential services, such as social security and Medicare payments, will continue.
The US military service will keep operating, and Obama signed emergency legislation on Monday night to keep paying staff. But hundreds of thousands of workers at non-essential services, from Pentagon employees to rangers in national parks, will be told to take an unpaid holiday.

So what happens how?

US politicians are meeting again in Washington on Tuesday. Before Monday’s session broke up, the lower house proposed a ‘bipartisan committee’ to consider a way forward. The Senate is expected to reject this proposal, sticking to its position that Obamacare cannot be unravelled. Federal staff will remain unpaid until a budget is agreed. A ‘stopgap’ funding plan is an option, but Obama appeared wary of that option, arguing that would simply guarantee a repeated fight in a few weeks’ time.

How much damage will it cause?

If people aren’t getting paid, they won’t spend as much in the shops. They may be unable to meet essential financial commitments, such as mortgages and credit card payments.

Analysts at IHS Global Insight have calculated that it will knock $300m a day off US economic output (total US nominal GDP, or output, was around $16 trillion last year).

The key issue is how long it lasts. Moody’s Analytics reckons that a two-week shutdown would cut 0.3% off US GDP, while a month-long outage would knock a whole 1.4% off growth.

When did this last happen?

It’s the first shutdown since 1995-1996, when Bill Clinton and the House of Representatives (and its speaker, Newt Gingrich) also failed to agree on a budget to fund federal services. That row ran for 28 days (over two stages).
But it was a more regular event in the 1980s, usually for a few days at a time. In total, the US government has partially shut down on 17 occasions before today.

Why doesn’t it happen in other countries?

The shutdown situation is a product of the US democratic system. The president is both head of state and head of the federal government, without a guaranteed majority in either of the legislative bodies where new laws are debated and voted upon (because presidents, congressmen and women and senators are elected separately). The president can’t simply ram laws through Capitol Hill.

In Britain, for example, tax and spending policies are outlined in the budget, presented to parliament by the chancellor of the exchequer. These changes are brought into law in a finance bill in the House of Commons. That’s in effect a confidence vote in the government, and even the most fractious backbench MP would balk at rebelling on it.

Finance bills are also one area where the elected House of Commons has the upper hand over the unelected House of Lords. The Lords have no power to reject a money bill; they can only delay it for a month.

How does the US shutdown row tie in with the debt ceiling battle?

They are separate issues, but the shutdown is raising fears over the debt ceiling.

America has a legal limit on its borrowing of $16.7tn dollars, and it’s likely to hit that point in mid-October.

If a deal isn’t reached, then America would run out of borrowing room, meaning the world’s biggest economy would default on its debts. Both problems need solving – and a shutdown is now eating into valuable time to fix the debt ceiling.

Why can’t they just raise the debt ceiling?

Again, legislation is needed. Republicans are again trying to link the plan to Obamacare – arguing that the healthcare reforms are unaffordable.

How are the markets reacting?

So far, there’s no panic. Investors are calculating that the shutdown will be short. But prepare for nervousness as that debt ceiling deadline gets closer.
The dollar, though, is being hit – dropping half a cent against major currencies.

So what does that mean for us?

Firstly, there is little doubt that the market right now is highly volatile. Stock prises can rise and fall dramatically. Explanations will definitely include lowered GDP for USA due to lower imports into USA and also lowered domestic consumption. Companies will definitely earn less and investors will usually remain risk-averse at the moment.

A partial shutdown of the federal government would cost the US at least $300 million a day in lost economic output at the start, according to IHS Inc.. While that is a small fraction of the country’s $15.7 trillion economy, the daily impact of a shutdown is likely to accelerate if it continues as it depresses confidence and spending by businesses and consumers.

Massachusetts-based IHS estimates that its forecast for 2.2 percent annualised growth in the fourth quarter will be reduced 0.2 percentage point in a week-long shutdown. A 21-day closing like the one in 1995-96 could cut growth by 0.9 to 1.4 percentage point, according to Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, Philadelphia.

Not all is lost though.

“If it does last two or three days, then the impact should be very limited, but there is obviously a risk that it doesn’t and then we run into the debt ceiling limit as well,” said Robert Prior-Wandesforde, a Singapore-based economist at Credit Suisse Group. “Given how high the stakes are, as we’ve seen a couple of times in the recent past, it will be resolved, or at least the can will be kicked down the road once more.”

“I don’t think there will be a noticeable impact on the other parts of the world because it basically only affects the US economy,” Kinoshita from Nomura, the global investment bank, said before the shutdown took effect. “The spillover effects to the rest of the world can be felt through the financial markets.

The global economy will probably withstand the U.S. government’s first partial shutdown in 17 years even as financial market volatility rises in coming days, analysts and policy makers say.

However, a shutdown that lasts at least a month could cause 1 to 2 percentage points being knocked off of fourth quarter GDP growth in the US, which would impact demand for Asia, he said. Asian economies that are most export-intensive and have the biggest share of exports going directly to the US such as Singapore, Malaysia, Taiwan and South Korea would be most affected, he said.

Reference materials: Economic times (India times) and Business Week.
 

So brace yourself, and as always, act rationally. Do your proper research before plunging into the markets especially during these uncertain times.

Peace out,

Theodoric