Latest News & Current Events

Government Shut Down, the US Debt Ceiling and Americas Position in the World

On the back of ongoing debate as to Americas global leadership role in the wake of the Syrian, Egyptian and Iranian political challenges, the promise of the US leading the world out of the economic recession has been a potentially positive sign when one considers the changing global competitive market place.

Signs of economic recovery have been positive, US manufacturing appears to have a new life and increased focus on education might all help to give the great US of A, a head start in the next stage of the race for global competitiveness. In the past while the US has been one of the first nations to go into an economic downturn, this has meant that the country is often one of the first to emerge from recession which provides some advantage in the next economic growth phase.  But wait, just as we are lining up to begin that next race, the dysfunctional political system in what has in the past been referred to as the “bastion of democracy” has decided that the best option at this point in time is to see if we can handicap ourselves to ensure that we do not get out of the starting gate with a head start, but instead try to blow our own feet off.

The US government has shut down, laying off hundreds of thousands of workers, closing national parks, and delaying vital services like passport renewal.  The impact of this initial shutdown is definitely significant in economic terms.  Research firm IHS estimates that it's costing the US government about $300m a day, for each day of the shutdown.  Overall, the last time the US government shut down in 1995 for 21 days, it cost the federal government $1.5bn - that's $2.1bn in today's dollars.  Goldman Sachs estimates a three-week shutdown could shave as much as 0.9% from US GDP this quarter.

Political parties seem to be far apart in their ideologies, with Democrats stating that attempts to blackmail the president and hold the country hostage over a healthcare bill that has been challenged and succeeded on numerous previous occasions is not how a democratic country should operate.  Republicans on the other hand have lambasted the president for refusing to negotiate on their attempts to delay or reject the universal healthcare initiative commonly referred to as Obama Care.

While the Federal Reserve has indicated that it will not begin to ease off its extraordinary efforts to prop up the US economy any time soon, partially due to Washington dysfunction. The ongoing disagreement in Washington over the 2014 budget and debt ceiling is definitely having a negative impact on companies hiring plans over the next six months. Global markets, always keen to see how the world's largest economy is faring, will certainly have cause to pause.

While internal politics may be the order of the day, the largest risk that is looming as this scorched earth approach plays out is the October 17th Debt Ceiling debate.  In a few weeks time if politicians cannot agree on raising the limit the US can borrow so that the country can pay its creditors the country will be entering uncharted territory.

While some may choose to grandstand that there is no guarantee that the sky will fall, very few economists and financiers believe that this should be open to debate.  Never before in its history has the US government failed to pay its debts. 

"Any delay in raising the debt ceiling would have dire economic consequences," said Moody's chief US economist Mark Zandi in recent testimony in front of Congress. "There will be a violent reaction in financial markets if policymakers fail to act in time," he warned.

It is time for our elected officials to step up to the plate and do the job that they signed up for – Governing this country not destroying it.

US debt chart

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