Now for the silliness in Washington where it’s generally agreed that some lunatics have escaped and are in control of the asylum bus and driving straight for a cliff.
If it wasn’t so serious, it would be amusing, but the way US politicians, especially the hardline rightwing tea party mob in the US House of Representatives, are blithely pushing the American government towards partial shutdown from sometime tomorrow, and then a default on its debt (not all though) later in the month, is terrifying.
If it happens, it will be the first time the government has been shut in 17 years – the last time was in 1996 and resulted in the Republicans losing the 1996 Presidential election to President Clinton, despite his various problems at the time.
The slow recognition of the potential problems around tomorrow and Wednesday seemed to grow late last week, with US bond yields falling and the value of the US dollar rising.
That saw currencies such as the euro and the Aussie dollar weaken – the Aussie ended at 93.17 USc early Saturday, close to its close the previous week.
Wall Street also dipped as the week went on, gold wobbled towards the end of the week, oil fell, but the Aussie market continued its slow, but steady boom, rising for the seventh week in a row.
On Saturday, the chances of a shutdown increased as Republicans in the House of Representatives rejected an emergency spending bill approved by the Senate and pushed instead for a one-year delay of President Barack Obama’s healthcare reform law.
The tea party Republicans want to stop the new healthcare system of President Obama, which is due to start on October 1, hence the latest confrontation.
Yesterday the House of Representatives returned fire by voting to postpone the start of Obamacare by a year, even though it has been approved by both houses and the US Supreme Court.
The Democrats promised the new bill would be defeated in the Senate, which however, won’t meet until 4am Tuesday morning, our time.
US analysts say that barring a last minute deal, the shutdown looks like starting around 2 pm Tuesday, our time.
The new health system is already being whittled back in various US states by Republican governments.
But the same states don’t want to cut the parts of the new health system that will bolster the Medicaid retirement welfare provisions (which many older tea party activists use).
Assuming that remains the case and nothing more develops (but probably will, hopefully) today and tonight, the shutdown will be partial, if it happens. The spending bills involved do not cover the entire cost of US government and the Republican dominated House attempted to soften the blow at the weekend by passing a bill that will keep the US military continuing to be paid.
But if the debt ceiling crunch happens, there won’t be any money to maintain this fiction.
The new funding resolution needs to be agreed by October 1 (tomorrow) to avoid the partial government shutdown and if that’s resolved (as similar situation have been resolved numerous times in the past), it’s on to the debt ceiling brawl with many commentators pointing out that if the Republicans lose out on the budget, their attitude to the ceiling question will harden.
For that reason, many US commentators point out the situation is potentially worse than in 2011 and has been considerably complicated by the souring of relations between President Obama and the Republicans, and inside the Republican party, with the Tea Party activists off on their own agendas.
That’s making it difficult to assess the chances of a shutdown this week, and for how long, and then just what happens with the debt ceiling brawl later this month.
The debt ceiling needs to be raised by mid to late October (starting from October 17, according to US reports) to avoid a partial US government default on its obligations.
RBS analysts said in the US that the government could get by to around the end of October (Halloween).
The August 2011 situation was settled by pushing the ceiling higher and then introducing the idea of mandatory cuts if there was no agreement by the end of 2012. There was no agreement by the end of 2012, so the so-called sequestration cuts started and have cut spending by around $US84 billion and growth by around 0.5% so far.
The most notable development from August 2011 was Standard & Poor’s which cut America’s AAA credit rating for the first time.
Not helping the Republican arguments this time is the fact that the US government’s financial position is improving dramatically.
The budget deficit is now approaching 4% of GDP (from a 2010 peak of above 10%) and is now projected to continue falling as the economy slowly recovers.
The improvement is coming from higher tax revenues and falling spending (on welfare) and the sequestration cuts.
US analysts warn that a lengthy shutdown would cut economic growth and tax collections by boosting unemployment and spending by millions of public servants.
The AMP’s chief economist Dr Shane Oliver warns that "the debt ceiling negotiations are perhaps the bigger risk as President Obama is so far refusing to negotiate, with the Republicans thinking that he will in the end. So both sides could end up playing a game of chicken with the risk of a miscalculation. "
But he says "the most likely outcome is a last minute deal, but it could get quite uncertain in the interim, which could unnerve share market investors.
"It’s interesting to note that past US government shutdowns, and there were 17 between 1976 and 1996 have had a mixed impact on markets. In fact the 32 day shutdown over late 1995 to early 1996 actually saw US shares gain 0.5%."
And rates fell sharply after the August 2011 situation, but that was because the US economy was weak and the eurozone was going through enormous pressures, leading to the outflow of funds to the US dollar (and the Australian dollar for that matter).
Moody’s Analytics analyst Mark Zandi estimated last week that a three-to-four week US government shutdown could cut four-quarter growth by 1.4 percentage points. He said Moody’s is currently projecting 3% growth in the fourth quarter without the shutdown (growth in the second quarter was 2.5% annual). Even a three-or-four-week gap would "do significant economic damage" he said.
And there’s a further problem: the huge US bond market would be hit by any sort of default. No one in the markets knows ahead of time just which bonds (Treasury notes, bonds, etc) would be affected.
The US Treasury apparently would know which bonds or notes are affected, but can’t or won’t tell the markets ahead of time because that would effectively be the same as the government declaring default.
The Fed won’t allow defaulted bonds to be used for loan collateral, even if those bonds are still trading at par (not showing the impact of any default by collapsed price).
RBA analysts said that there are no cross defaults on US securities, so a default on one or more group of bonds or securities won’t impact other bonds where the coupon payment is still to be made, or has already been made.
