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US government shutdown could cost as much as $300m a day

At midnight on the night of September 30th/October 1st, the US government entered a partial shutdown following a disagreement between rival parties over how it should be funded over the next year. Early estimates indicate the shutdown could cost as much as $300m a day.

The first shutdown in 17 years came as the Republican-led House of Representatives insisted on delaying President Barack Obama’s healthcare reform, known colloquially as Obamacare, as a condition for passing the budgetary bill. It means that several government departments have had to shut down completely, while some have seen partial closures. All in all, 700,000 public sector employees have been placed on mandatory unpaid leave, a move which sees key services and departments such as the IRS, the military, and rubbish collection in Washington DC heavily affected. Both sides continue to blame each other, with President Obama stating the shutdown was ‘completely preventable,’ while Republicans say they will not vote in favour of raising the debt ceiling unless changes are made to the healthcare bill and financial regulation proposals. Who is to blame is now an irrelevance and focus is switching to how it can be resolved and what the consequences of the shutdown are.

Yesterday morning (October 1st), the Senate voted against formal negotiations to end the deadlock and there are fears that a repeat of 1995/96’s record 21 day shutdown may be on the cards. Back then, the economy was booming, primarily due to a thriving tech industry as the internet was taking off. Unemployment was a low 5.6% and tech start-ups were springing up all over the West Coast. Today’s economic situation is very different, with unemployment at 7.3% despite recent falls and labor participation at its lowest rate since August 1978. This, coupled with fewer signs of compromise than President Bill Clinton and Newt Gingrich showed 17 years ago, spells bad news for the US economy.

Research firm IHS estimates that the shutdown will cost the US government about $300m a day, while Goldman Sachs estimates a three-week shutdown could reduce US Q3 GDP by as much as 0.9%. These figures are, of course, just estimates but they illustrate the seriousness of the situation. The US economic recovery has been stop start since the nadir of 2008 and this is something the country cannot afford. Markets have so far remained bullish but the Dollar is weakening against other major currencies and markets cannot ignore the uncertainty indefinitely. Both sides of the argument must now look to compromise and reach a swift resolution or risk sewing something they may well reap for years to come.

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