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The US Government Shutdown Story Isn't Over Yet

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The US Government Shutdown Story Isn't Over Yet PART 2 OF 2

What’s the Economic Impact of the US Government Shutdown?

Economic cost of government shutdown was negligible

The latest US government shutdown only lasted for three days and is unlikely to have any major impact on the US economy. As per an estimate from the US Bureau of Economic Analysis, a 16-day US government shutdown in 2013 resulted in a 0.3% loss in US real GDP growth, primarily because of the reduction in working hours of federal employees and federal spending. There could be other indirect impacts on the economy, but they could be negligible, as the shutdown was only for three days. The figure below is an excerpt from a study conducted by the Committee for a Responsible Federal Budget in 2013, which lists the economic impacts of a US government shutdown.

What&#8217;s the Economic Impact of the US Government Shutdown?

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Impact on the US Treasury

The recent US government shutdown didn’t affect the issuance of bonds by the US Treasury, as this debate was not about the debt ceiling. A bill suspending the US debt ceiling was signed by President Trump on September 8, 2017, which set the debt limit at $20.5 trillion. This suspension expired on December 8, but the US Treasury has been issuing government bonds (GOVT) through extraordinary measures. These measures mean that the US Treasury (LEI) is swapping debt held by the government (which is non-marketable) to marketable debt. This way, the total debt remains below the debt ceiling limit.

Risk of a US default

The US Treasury is likely to run out options to maintain the debt-ceiling limit in March when the debt limit must be increased or suspended again. If this is not done, the US economy (VOO) is likely to default on its interest (BND) payments, which would be a catastrophe for the global financial markets (SPY).

The recent government shutdown might only be a trailer for what’s to come in the next few months. The first hurdle would be in February and the second one would be in March. The only hope is that both the Republicans and the Democrats understand the implications of such logjams and can find common ground.

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