The U.S. Avoids A Shutdown But Is There More Trouble Ahead?

For the past few months, politicians have been bickering on how much the government should cut back on its spending. Everyone had braced for a shutdown, expecting that without an agreed budget to work with, the government would have to suspend its non-essential services.

But Republicans and Democrats came through and set their differences aside… at least for now. A compromise was reached on Friday, just hours before the midnight deadline, to cut federal spending by 38 billion USD for the next six months. Whew, that was close! The Congress also came up with a short-term funding plan to sustain federal spending until the budget is officially approved on Thursday.

However, I can’t help but wonder what would happen if an agreement wasn’t reached. A few cool cats said that they never worried about the possible shutdown–not even for a minute! They say that if did happen, it would just be a matter of history repeating itself.

You see, fifteen years ago, the government suspended some of its services for six days in November and 22 days in December to January 1996. Some giddy analysts argued that the negative effects on growth by the 1995 shutdown were insignificant enough for the economy to shrug off. So why would another one this time around be any different?

Market junkies did the math and estimated that a week-long shutdown would reduce government spending by 8 billion USD and translate to a measly 0.2% downtick in 2011 Q2 GDP.

On the other hand, naysayers think that aside from government spending, the estimated 800,000 government workers who would’ve been forced to take unpaid temporary leave of absence would impact consumer spending. And don’t forget the potential loss to businesses that provide services to federal agencies and generate revenue in national parks, museums, and zoos.

But a shutdown was avoided, so it’s all good, right? Err, not really.
Zoo
Yes, government workers won’t have to worry about having one heck of a long weekend and zoo animals won’t go hungry anymore, but analysts are jittery about Congress not being able to effectively address more pressing issues. One particular worry is the debt ceiling. It was said that if a shutdown did happen, the U.S. would hit its debt ceiling of 14.29 trillion USD sooner rather than later.

Think of the amount like the limit on your credit card. For Happy Pip, reaching her debt ceiling will mean that she may not be able to get herself the nice pair shoes that she’s been eyeing. Treasury Secretary Timothy Geithner said that for the U.S., this means that government employees will have to wait longer for their paychecks to come and Social Security and Medicare benefits may have to stop for a while. It may even lead to the U.S. defaulting on its debt! Yikes!

One solution to prevent this from happening is to raise the debt ceiling which the Congress will have to discuss soon. Um, I’m not exactly confident that the process of reaching a decision will be any smoother than what we just saw though.

I’m sure that’s something everyone in the FX hood is looking forward to. For now, I think the dollar will be able to take a breather from the bears as the U.S. government was able to dodge a shutdown. Hopefully Republicans and Democrats will be more impressive in showcasing their decision-making skillz in the future. Who knows, maybe they have learned their lesson in making compromises.

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