Even though U.S. President Trump’s bark is way worse than his bite, one can’t help but think about the potential impact of a government shutdown on the financial markets and the U.S. dollar.
Here’s what happened before and what might happen this time.
You see, this isn’t the first time that the U.S. government has come close to a shutdown.
A couple of years back, folks over at Capitol Hill stirred up some trouble in Washington for bickering over funding for Planned Parenthood but came through with an eleventh hour deal to pass a stopgap bill.
In 2011, the government was also able to narrowly avoid a shutdown by calling a truce to cut federal spending by 38 billion USD for the next six months just hours before the debt deadline.
This time around, the Donald has threatened to shut down the U.S. government if Congress doesn’t give him the funds to build his infamous wall. However, the administration still has a bit more time on its hands as lawmakers have all September to debate about raising the debt ceiling before the deadline on October 1.
What the heck is a government shutdown anyway?!
For the forex newbies just tuning in, a government shutdown is exactly what the term implies so you can bet that this situation would have an impact on the U.S. economy.
Wikipedia defines it as “a situation in which the government stops providing all but essential services” such as crime prevention, fire fighting, or weather forecasting.
It is actually up to the Office of Budget and Management to draw the line between essential and non-essential services, although it is likely that national parks and some minor government offices will be closed.
This means that close to 40% of federal employees would be forced to take an indefinite unpaid leave while workers who aren’t furloughed will probably receive their salaries only after the shutdown ends, possibly weighing on consumer spending during that period.
What happened during previous government shutdowns?
Back in 2013, the U.S. government was shut down for half a month due to the lawmakers’ bickering over the Affordable Care Act a.k.a. Obamacare.
House Republicans wanted to delay this legislation in order to trim healthcare spending and reduce the budget deficit but Senate Democrats kept rejecting their proposals.
At that time, the U.S. government was on the verge of hitting its debt ceiling and possibly defaulting on its obligations.
Approximately 800,000 government employees were furloughed then and another 1.3 million workers were required to report to work without any guarantees on when they’d receive their salaries.
Thanks to a last-minute vote by lawmakers to move the debt limit, the shutdown ended after 16 days but analysts estimated that it still shaved off around 0.6% of the country’s GDP during Q4 2013.
In the 90s, the U.S. government was also shut down during the Clinton administration, leading to government services being suspended for a total of 27 days and putting a 1% dent on the country’s annual GDP then.
How might the dollar react?
For now, it looks like the Greenback has a lot more issues on its plate before getting all worked up about a potential U.S. government shutdown.
But if push comes to shove, the currency could be in for a steady decline as the debt ceiling deadline looms closer without any deal in sight.
Keep in mind that the U.S. currency is already being bogged down by the weakening likelihood of another Fed interest rate hike before the year comes to a close.
To top it off, the drama inside the White House and prevailing risks of a North Korean missile strike aren’t doing the dollar any favors either.