America’s Budget Stand-Off: Consequences of a Fiscal Crisis

myriam20130417081918150Domestic US government funding hit a brick wall last night, after an ideological battle over fiscal policy escalated into a war of attrition. The opposing House of Representatives and Senate, controlled by the Republicans and Democrats respectively, have been unable to agree on a budget. Hence, internal funding from taxes has ceased to flow around state agencies. At the core of the debate is the state-funded health plan known as ‘Obamacare’, a policy that the Republicans are demanding a delay on before they come to the negotiating table. A similar crisis occurred in the mid-1990s, when then-President Bill Clinton clashed with House Leader Newt Gingrich – the US government effectively shut down for three weeks, again due to debate over healthcare and social policy. There are many potential consequences of such a stand-off, including currency devaluation and reduced homeland security, although the key date that will determine the true damage of such a ‘blackout’ is October 17th, known as the ‘debt ceiling’, when the US Treasury reaches its borrowing limit and the US will be effectively temporarily bankrupted.

Economic Consequences

The on-going cost of a lack of liquidity will, according to analysts at Goldman Sachs, cost the US government around $8bn a week, which isn’t particularly significant in such a large economy. However, this dip in growth is simply a short-term loss – there are other economic factors that may experience more detrimental damage. Even yesterday afternoon, before the deadlock had been confirmed, equity markets began to tighten as uncertainty took hold. Energy and consumer markets took hits as the Standard and Poor (S & P) 500 slid 0.6% in the final minutes of trading. The US Dollar as a currency also experienced decline in value, falling to a seven-month low overnight.

The impact so far, however, has been relatively light. It seems that the markets were firmer than expected, and analysts are generally holding out for a short deadlock between the Republicans and the Democrats. Certainly, provisions are in place for a week or two of dry cash flow, but October 17th is looming and if the Senate and the House of Representatives fail to reach an agreement by then, there is far more at steak than snipped growth or poor exchange rates. There is a risk of the entire US fiscal system deconstructing itself if the government is unable to borrow to cover debt.

Domestic Consequences

Non-essential US government agencies will begin to temporarily shut down, pushing around 800,000 employees onto unpaid leave. The effects on everyday life may seem trivial at first, but they could be the key to eventually resolving the stand-off, given the ideological nature of the Republican/Democrat disagreement. Over 90% of staff at both NASA and the Environmental Protection Agency are to be denied pay, as are significant proportions with Homeland Security and the Department of Energy.

Some analysts have considered Republican stubbornness to be the central cause of the stalemate, and simply making a point towards the Democrat’s support of state-funded healthcare. There has been controversy recently over the methods used to push through health reforms, and so the Republicans are perhaps making an ideological stand. If this is the case, then the shut-down should not last longer than a few days. However, if this is a more serious disagreement, the world could be panicking over the next couple of weeks as the debt ceiling edges closer.

Conclusion

It is the opinion of some that a stalemate has occurred not because of widening differences in Republican and Democrat policy, but simply because of equal stubbornness on reasonably day-to-day policies (from an Anglo-centric view). Obamacare will always cause controversy in US government, but some will suggest that closing down half of the system is going slightly too far, especially if the international markets are drawn into the fight. The world will rest easier if the negotiating table is met, which must happen before the 17th to prevent a slump into financial oblivion. Unless of course we are discussing perpetual debt, as in Orwell’s perpetual war, in which case the Party will be held to account.

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