Shut Down in the US

Shutdown because of the slowdown

The US is in the news again, with their government heading for a “shutdown” for the first time in 17 years. So what exactly does this shutdown mean? For the people there and for us sitting almost 15,000 kms away in India?

Shutdown or Breakdown

In the US there are several departments that work only due to direct funding received from the US Government, over the last few years this government debt has been mounting to gargantuan levels. As a result the Republicans are pressurizing the Obama administration to cut down on health costs and benefits etc provided to the US citizens, in a bid to rein in this debt, leading to this “shutdown”.

A shutdown, therefore, is a political situation in which the US government stops providing for all but "essential" services such as police, fire fighting, etc. So unless the US Congress raises the federal borrowing cap (the legal limit on how much debt the US government can pile up), some government departments would shut down starting October 1, 2013 as those departments will run out of money to pay their bills.

The essential workers will work without pay, while those working in the rest of the “non essential” services will be at home until the US Congress works out a solution. These include health, housing, parks and museums etc.

While there have been nearly two dozen instances of shutdowns since the 1970, some consolation for US citizens is that the longest shutdown has lasted only for 17 days and the workers, it is assumed, will be compensated for the days lost once funding to these departments resumes.

What markets across the globe would be more worried is about the dispute over the raising of the debt ceiling.

Says the Washington Post:

"If we hit the debt-ceiling then the Treasury Department won't be able to borrow money to pay for spending that Congress has already approved. In that case, either Congress will have to lift the debt ceiling or the federal government will have to default on some of its bills, possibly including payments to bondholders or Social Security payouts. That could trigger big disruptions in the financial markets-or a long-term rise in borrowing costs."

Crying Wolf?

However this is the worst case scenario which it is hoped, would not occur, since the US Government will avoid such large disruptions as mentioned by the Washington Post, so quickly after announcing that they may continue Quantitative Easing.

The Indian markets seem to be watching the US very closely and are in the green at the time of writing the article, probably based on some local news. Investors may feel they have “ been there and done that” before and know how it ends: with another last-minute deal between the Republicans and the Democrats, since the world can ill afford an unstable US economy right now. However if the deadlock continues for a longer time, chances are the markets could react adversely to that news.

The world seems to be watching the situation in the US right now, not panicking, but watching it closely.

Source: Washington Post