What is the US Federal Government Shutdown

So, a few days into the US Government shutdown we have a quick look at what this means and how it came to this:

What happened and why?

The Republicans have refused to fund the U.S. government unless President Obama rolled back his healthcare law, even though large parts of which went into force on 1st October. (The 1st October is the beginning of the US Fiscal year). At this time each year the House of Representatives and Senate funds all Government expenditure in budget discussions.

The Republicans control the majority in the House. They have not voted in the budget changes in protest over ObamaCare as the Republicans want amendments to it. These amendments were sent to the Senate where the Democrats hold the balance of Power. They (and the President) rejected the amendments.

‘‘As long as I am President, I will not give in to reckless demands by some in the Republican Party to deny affordable health insurance to millions of hardworking Americans,’’ Mr Obama said.

John Boehner, the Republican Speaker of the House of Representatives, offered to begin talks with the Senate but was turned down by Democrat senators who said negotiations would lead nowhere.

So at midnight on 1/10/13, the US Government had no more funding approved to continue to pay for services. Therefore a large number so Government employees were stood down and many Government facilities closed.

Of course, there has been no closure of investment markets or other enterprise related entities.

But what will happen to investment markets because of this?

It may sound like a new story but it is merely be repeats of the same old tales. US government shutdowns are not new at all: there have been 17 in the past 40 years, with the last occurring in 1996 during the Clinton administration.

Investment Bank UBS expects that a government shutdown would not persist beyond one week saying, “A short-term shutdown would not be catastrophic for the economy or financial markets”.  History also suggests equities recover after shutdowns. If however, the shutdown persists for more than a week, “equities could come under pressure.”, they added.

The Australian dollar has strengthed in recent days as a result of the impending and now arrived shutdown. This is because the U.S. dollar is weaker as a result. The shutdown could prompt the U.S. Federal Reserve to postpone the start of its withdrawal of monetary stimulus.

“We do not know how long this impasse will last. If it persists, there is a chance it will hurt economic growth and affect chances of Fed tapering – all of which is dollar negative,” said Daragh Maher, strategist at HSBC.

However Shane Oliver, AMP’s chief economist, agreed that it will really depend on how long the shutdown lasts for. “If it’s a prolonged shutdown, then that obviously would have global implications for growth, including in Australia.”

“At this stage though, it’s still early days. Politicians don’t want to get blamed for the crisis. But then again, US politics is more dysfunctional than it used to be.” Oliver added.

The Australian sharemarket has not been adversely affected as yet, especially with its solid run experienced since early June.

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