US government shutdown isn’t the worst of it

 
Capitol Hill exit sign

The United States government may be forced to shut down at midnight for the first time in 17 years. Sounds ominous? That's not the worst of it.

The bigger problem is, if the Democrats and Republicans continue to disagree, then the US would breach its "debt ceiling" - that means there's a chance that the world's biggest economy could default on its debt.

Firstly, coincidentally, the first government shutdown happened on this day in 1976. Since then, there have been 17 occasions when there was no agreement on the funding of government spending. The last time was 17 years ago during the Clinton administration, which also saw the House and Senate divided over spending priorities.

If the Democrat-controlled Senate sends back the Republican-controlled House version of the spending bill that delays the funding for Obamacare as expected, then 800,000 federal employees won't come in tomorrow and, probably, also the next few days. The shutdowns in 1995 and 1996 lasted five and 21 days, respectively.

There would be a fairly big impact on the economy. Economists estimate that a two-week shutdown could cut GDP growth by 0.3 percentage points and one that lasted three-to-four weeks could cut growth by as much as 1.4 percentage points. That's a pretty hefty hit as the US was projected to grow and an annualised rate of about 2.5% in the fourth quarter.

And then it could get worse - the US could default on its debt.

Technically, the $16.699 trillion debt ceiling was hit on 19 May. The US Treasury has been using extraordinary measures to keep going. If Congress doesn't raise the so-called "debt ceiling", then the Treasury estimates that it can only stretch out the money until 17 October. At which point, it could run out of money to pay the interest on US government debt, and the US defaults in a technical sense if it misses an interest payment.

That is what the debt ceiling is. It is the amount of debt the US can borrow. The problem is the ceiling could now prevent the US from borrowing to pay the interest on the money that it has already borrowed.

Until recently, it wasn't a big issue. Since 1960, the debt ceiling has been raised 78 times. The real debate was always over the spending bills rather than using the debt ceiling as a bargaining chip of sorts.

However, it has become a bargaining point with a divided Congress. This is the third time that there's been a showdown during the Obama administration.

And it has been damaging. In 2011, the US lost its top AAA credit rating for the first time. The rating company S&P made the historic downgrade partly on the basis of the fiscal impasse.

Two years later, the impasse has again reared its head. The timing couldn't be worse as the US recovery is just gaining steam. And the fragile world economy doesn't need the possibility of default by the world's economic engine dangling over it.

 
Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this
    0

    Comment number 205.

    I banged on since 2004 about accumulation. That is broad capitalism with its capitol ‘C‘ if you like. The monetary financial industry is ruthlessly selfish and can be nothing less. The trillions invested are driven for a real return and there is your problem. Insurmountable it becomes, driven by bull.

    Interest rates only protect against inflation. This is of course Pi in the sky Iceberg ahead

  • rate this
    0

    Comment number 204.

    Piers Morgan is ranting on CNN like a chicken with its head cut off. "The sky is falling, the sky is falling." Poor Piers, he can't visit the Statue of Liberty tomorrow. Should have gone over the weekend. You'd think the world is about to end.Real democracy is a messy business. It's not like a Parliamentary dictatorship where one side has all the power.The political parties are mere vehicles.

  • rate this
    0

    Comment number 203.

    @184.sagacity

    I think I get it. (?)

    Thanks!
    You know your stuff.

  • rate this
    +1

    Comment number 202.

    Another of these points to ponder, if all the capitalist countries are in debt, and it seems they are, the question is to who.
    If it is to each other, which seems likely then what a strange scenario it portrays. It shows that the underlying causes are GREED and tribalism.
    Because money is a concept, it is relatively easy to change things IF governments want to. Business however doesn't want change

  • rate this
    0

    Comment number 201.

    Sixteen more minutes to shutdown.This is as exciting as watching the ball come down at midnight on Times Square on New Year's Eve or seeing the space shuttle land.Three, two, one, MIDNIGHT! Kersplat! We've survived worse. We've survived wars, hurricanes, depressions, and we even survived a British invasion...I'm referring to the Beatles, the wars with GB in the 18th and 19th centuries were easier

  • rate this
    +1

    Comment number 200.

    What an utterly insane state of affairs. A national Gov having to borrow more in order to pay interest on existing debt! Yet we all go to work as normal, pretending nothing is wrong at the core of our monetary systems. I can't help feeling our canoe has entered a murky creek, and when this party is over none of us will be able to afford a paddle.

  • rate this
    -1

    Comment number 199.

    Don't worry Linda, China will get paid the interest on its bonds if President Obama has to print the money himself. Actually the one who will do it is Jacob Lew. And he won't use printing presses, it's all done by computer. IMO printing more money to deflate the US currency and the value of US debt is long overdue.The FED created only $3Tn. Another 2 to 7 is needed.Best to do it all in one shot.

  • rate this
    +1

    Comment number 198.

    Obviously this isn't a very well thought out plan, which belies a much bigger problem than the one being discussed. Shall we talk about "the elephant in the room" or continue to pretend that we can have a Democracy without having an informed, responsible, compassionate populace guiding it?

  • rate this
    0

    Comment number 197.

    I will pose the following question:

    Assume that a meteor of very large size were to be discovered on a direct line for Earth.

    How much money would humans be willing to invest to attempt to save this punny planet from a definite mass extinction event?
    $10 Trillion $20 Trillion $100 trillion?

    Right now that rock is a false alarm and you now have $100 trillion spare to save good people hardship.

  • rate this
    0

    Comment number 196.

    And then it could get worse - the US could default on its debt.
    ==================
    That is a really good laugh.
    The size of America's debts is so huge that it was mathematically impossible for them to pay it off in 2010.
    Last year there was a lot of tussle about the debt ceiling - but it was increased above what it should never have been.

    What are they going to do this time around?
    Shout HELP! ?

  • rate this
    +2

    Comment number 195.

    Why delay Obamacare? In what way it will help reducing debt? As a matter of fact Obamacare, if implemented properly can reduce fiscal deficit over years. Try to seal the drain of illegal insurance claims, reduce bonuses, and kickbacks from financial and lobbyist industry. Obamacare delayed will have irreparable damage for common man. Health lost can never be regained. Increase debt to $20 trillion

  • rate this
    0

    Comment number 194.

    Honestly, do people want to see government services stopped?

    Thats hospitals, schools, emergency services, waste management, road maintenance ect ect ect.

    The answer is no.

    Think outside the box and remove that which is holding us back and move forward.

    Stop looking for solutions within the system that has already failed.

  • rate this
    +3

    Comment number 193.

    The Republicans and their terminal cancer the Tea party have become the brown shirted thugs of corporate fascism in the US. It is the best government big money can corrupt. The damaging societal excesses of unregulated capitalism show it to be another tyranny that exploits the many for the priviledged few. The French back in 1789 knew what they were doing cutting off the heads of the 1%.

  • rate this
    +2

    Comment number 192.

    It is the house of representatives, senate, judiciary and presidential pay that needs to be stopped, not government services. Perhaps that may hasten them to do their job? Properly.

  • rate this
    +1

    Comment number 191.

    Capitalism has failed.
    It was never sustainable anyway.

    Time to congratulate the winners and start the debate on a new way.

    Write off all present and future debts and let countries print all the money they want.

    Freeze inflation permanently and anything else that tried to keep the balance and failed.

    Why let what we have built fall because our economic system is defunct?

    Change the system

  • rate this
    0

    Comment number 190.

    Shut it down and save some money! How else will this curtail the continual spending habits of the U.S. government? And each political side blames the other! As Miss Yueh says above: "And then it could get worse - the US could default on its debt." Well, time to start saving! Shut it down now!

  • rate this
    0

    Comment number 189.

    After years of blatant gerrymandering and efforts to deny voting rights, this latest GOP attempt to coerce Dem.s into fulfilling their agenda, shows they understand they are finished with even the pretense of representing, or garnering the support from, the will of the people.

    Democracy is a loss for them. This is a death throe. The more quickly their agony ends, the better for the country.

  • rate this
    +2

    Comment number 188.

    Well, at least Bill Maher will have a go at the republicans.

  • rate this
    -1

    Comment number 187.

    A dismal picture. The Democrats determined to carry on spending like drunken sailors and the Republicans trying to use backdoor tactics to stuff Obamacare. They are both fiddling while the USA economy burns.

  • rate this
    0

    Comment number 186.

    How about shutting down BBC business pages?
    Do we really need two BBC editors Peston and Yueh having overlapping comments on the same topic. Total waste just give us a link to Bloomberg.

 

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