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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

Oxymorons (Saving Money)

‘USA wants to China to raise the value of their money so they can export more to them. However, doing so results in unemployment for China.

USA then devalues their dollar while China devalues their currency. Weaker currency means inflation at home.

So why save money when countries are making their money less valuable?’

Governments print trillions of dollars everyday to pay off debts. With this amount of money floating in the system (when money is used to pay off debts to other countries.), value of the currency depreciates. Money you’re holding on to loses its value even without you doing anything.

This is why ‘Saving money’ is an oxymoron.

“So easy to get money, so hard to clear”

This blog post is in reference to today’s Straits TImes article 

So hard to clear debt

Imagewhere it is highlighted that it’s ridiculously easy to borrow unsecured loans, but incredibly hard to repay the interests, which rack up to a whopping 24%

 The next few points come across as pretty pretentious given someone who hasn’t owned single credit card in his entire life, but I feel is some points I’ve gathered after reading the article.

Firstly, many reasons why such debts are incurred is due to accidents, unexpected hospital bills and medical charges.

So this comes to my first point

Insurance

ImageBefore I start this point, let me mention that I am no insurance agent, nor anybody related to the sales of insurance or its companies. I personally feel insurance is one of the most important, if not the most important thing you need to own. Insurance, despite its sometimes hefty payments, are what creates the safety net to fall upon in case of such incidents. Nobody can safely say ‘I’ll never get into an accident’. Insurance is needed to cover this probability of getting in an accident. The amount you pay monthly will definitely beat having to borrow money to pay for hospital fees you’re not ready for.

Besides, insurance can also be another good form of investments. More on this will be described in future blog posts.

 

 

Doodads

Sometimes, credit cards are used to buy luxury items and services such as spas, facials, dining, etc. The incredible discounts that each card offers is amazing, and there’s simply no reason to ignore this privilege right?

Wrong.

The amounts may come out as minuscule, but racked up, they can come up as a sum much more mind-blowing than you first imagine. $100 may seem no different from $150 on a credit card bill, but as these payments added up, there’s an inevitable headache coming your way.

Pay through your cards, but don’t pay using your card. Only buy things you are sure you can afford.  

 

Liabilities

Probably the worst things you can buy using your credit card is what I have defined as a liability. In any case, let me define it again, is that liabilities are things that take money out of your pocket.

By using credit cards to purchase a liability (a sports car, a yacht) etc you incur not only interest costs from the credit card, but also money that are siphoned from the liability you just bought. This snowballs the entire situation. It will be much better instead to use cash you can afford to lose, not charging it to your credit cards.

Gambling and other bad habits

The worst type of debts are those incurred for bad habits. These will usually spiral out of control and end up in a worse senario. Gambling never pays off. Go for cashflow, not for probability.

 

I know all these seems very pretentious for somebody who hasn’t even graduated and stepped into the working world. But if I, as someone inexperienced, can think of all these, I’m sure plenty of adults can as well. It’s time to take charge of our finances. Act responsibly. 

Cheers,

Theodoric