All you wanted to know about the US shutdown
4 min read . Updated: 03 Oct 2013, 05:36 PM IST
PremiumThe entire world is watching the US. Here's what the shutdown is all about and its repercussions
Starting 1 October, the US government partially shut down its non-essential activities as the US Congress failed to pass the budget before the deadline. The largest economy in the world reached this situation after both the Republicans and the Democrats failed to arrive at a middle ground on Affordable Care Act, also known as Obamacare. Two days after the shutdown, President Barack Obama tweeted this link from The Huffington Post on how the states are getting affected due to the government shutdown.
One Nation Under Shutdown: Here’s How Congress Is Hurting Your State
“Less than two full days in, thousands of National Guard members have been furloughed, scientific research has been halted, federal technicians have been forced off the job, and wildlife refuges have been closed," the article noted.
Earlier, Reuters compiled and presented a list of activities that will get affected due to the shutdown, which was also published by www.livemint.com
US government shutdown: What it means
The shutdown is likely to affect the economic activity, though the extent will depend on how long it lasts. Bloomberg Businessweek summed up how the shutdown will affect the US economy.
The Weird Reason Shutting Down Government Will Boost Growth
However, the most disturbing implication of this political logjam is that Washington will soon reach the debt ceiling after which the US government will not be able to discharge all its obligations. In a letter to the US Congress on 25 September, Jacob J. Lew, secretary of the treasury, said: “Treasury now estimates that extraordinary measures will be exhausted no later than 17 October. We estimate that, at that point, treasury would have only approximately $30 billion to meet our country’s commitments. This amount would be far short of net expenditures on certain days, which can be as high as $60 billion. If we have insufficient cash on hand, it would be impossible for the US to meet all of its obligations for the first time in our history."
Secretary Lew Sends Debt Limit Letter To Congress
Although the US has recovered well from the shutdowns before, but the problem this time is the debt ceiling. “The US has had 17 government shutdowns since 1977 and has generally recovered well. But we have never had a default. Experts, while not fully certain, are convinced that it could be hugely destructive—even leading to a worldwide financial meltdown," noted David Gergen, political analyst for CNN and someone who has advised four presidents.
Shutdown could be shock therapy
If the US Congress is unable to raise the debt ceiling in time, it is likely to have wider economic consequences. “The full consequences of the world’s biggest, most important borrower defaulting are largely unknowable. Suffice to say that after two financial crises in the last five years (America’s mortgages and European sovereign debt), a third is the last thing the global economy needs," noted The Economist while explaining why the debt ceiling matters.
Why does the debt ceiling matter?
The basic issue is that the debate in the US is deeply political and no side is willing to blink. “President Obama must not give in to this hostage taking—not just because Obamacare is at stake, but because the future of how we govern ourselves is at stake," said Thomas Friedman in his column in The New York Times.
Tension is also beginning to rise on the Wall Street and analysts have started exploring possibilities. Obama also warned the Wall Street that it should be worried about the political crisis.
Barack Obama warns Wall Street over fiscal crisis
However, if the Congress fails to raise the debt ceiling in time, there are still options available with the US President which will save the country from default. “According to some legal theorists, the President could essentially ignore the debt limit imposed by Congress, because the 14th Amendment states that the ‘validity of the public debt of the US, authorized by law’, including for debts like pensions and bounties to suppress insurrections, ‘shall not be questioned’," The New York Times reported.
Wall St. Fears Go Beyond Shutdown
Even if the President bypasses the debt limit by the US Congress, the political logjam may still affect the US economy.
India is not immune to the developments in the US. The silver lining for India so far is that the US Federal Reserve may further delay its decision to taper the bond buying programme because of uncertainty in the US economic environment, which is likely to help India make necessary adjustment on the external front.
Should the US shutdown worry you?
The US dollar has also fallen against the basket of currencies, leading to appreciation of the Indian rupee.
Rupee strengthens to 61.88 as dollar loses steam
This is also helping boost sentiment in the stock market.
However, if the issue of shutdown and debt ceiling is not resolved soon, sentiment may quickly turn negative in the global financial market, affecting stocks and emerging market currencies.
