It’s official! For the first time since 1996, the U.S. government has been shut down. Is it the end of the world? Will the U.S. economy crash? Should I sell the dollar like there’s no tomorrow? Will the forex market shut down? What does the fox say?!
Now before y’all get ahead of yourselves and start panicking, let’s take a closer look at what caused this shutdown and what it implies for the U.S. economy.
The Cause
Stubborn U.S. lawmakers are mostly to blame for this mess, as the Republicans and Democrats refused to compromise. At the center of their arguments was the Affordable Care Act a.k.a. Obamacare, which House Republicans wanted to delay. Senate Democrats, however, kept rejecting the proposals being made.
You see, lawmakers have been pressured to come up with a plan to cut spending so that the U.S. can avoid reaching its debt ceiling and possibly defaulting on its debts. With lawmakers unable to agree on how to trim healthcare spending, the federal government is faced with no choice but to halt some of its non-essential operations.
The Effect
Now that we know who to blame for the government shutdown, let’s figure out what this means for the economy and the dollar:
1. Loss of income
As I mentioned in one of my previous articles, a government shutdown involves temporarily closing down some government agencies and services, which means that some people will not have jobs for a while.
In fact, about 800,000 federal civilian workers will be furloughed starting today. This includes workers in national parks and monuments, which spans everything from Yosemite to the Statue of Liberty. Imagine the loss of income as these workers will be sent home without pay indefinitely!
After crunching the numbers, analysts estimated that the shutdown can shave as much as 0.2% from the U.S. economic growth if it lasts for a few days. As seen in the past shutdown during the Clinton administration, a government shutdown that lasts a couple of weeks could eat up close to 1% of the GDP!
2. Shutdown of select financial services – No NFP this Friday!
Market junkies aren’t going to appreciate that the partial shutdown includes interruption in some key financial services. For example, the Internal Revenue Services (IRS) would stop answering phones and auditing taxpayers. The Securities and Exchange Commission (SEC) would also stop handling registrations including IPOs. Sorry, guys. Guess you’ll have to wait longer for Twitter’s IPO offering.
What’s more important for many market players is that the Bureau of Labor Statistics won’t be releasing the all-important nonfarm payrolls (NFP) data during the shutdown. With Bernanke pegging the Fed’s next moves on future economic data, the loss of the employment numbers would make it even harder for the Fed to schedule their taper plans.
3. Higher risk of US credit d******
Forget the NFP report- we have bigger fish to fry! Investors around the world might not be happy with the government shutdown, but they’ll be as jumpy as kids on a sugar high if the government doesn’t raise its debt ceiling in less than two weeks.
A while back Treasury Secretary Jack Lew has estimated that the U.S. government would reach its current debt limit by no later than October 17. If the government doesn’t raise the ceiling by then, then Uncle Sam won’t have money to pay its creditors and have to DEFAULT.
This could knock down the U.S. credit rating from its AAA status and cause mayhem in major investors around the world. Take note that the U.S. hasn’t defaulted on its debts in… NEVER.
Credit: Piponomics
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