Another government shutdown looking likely

October 1st is the deadline for avoiding yet another federal government shutdown in the US. Senate leaders are pursuing a stop-gap funding bill to extend the present budget for about 2 months with funding for women's healthcare group Planned Parenthood a significant sticking point. Concurrently, the White House has begun cooperating with federal agencies on planning for a shutdown. In a research note published on Wednesday, TD Securities analysts predicted a 55% chance that the US government will be shut down as a consequence of the lack of agreement. Today the debt ceiling is set at $18.1 trillion and since 1940, we’ve seen 95 measures taken to adjust the debt limit. Many will recall the last shutdown in 2013 which was the 3rd longest in history lasting 16 days.

We’ve written about these shutdowns before and have commented that in some ways, the debt ceiling is an irrelevant limit given that the debt is now well beyond that which can be serviced. Shutdowns themselves however are relevant as they are economically wasteful at best and in reality quite harmful. Even the threat of a shutdown consumes resources in terms of the planning required to do so. Government shutdowns hurt those who have their personal financial situations linked to the federal government. This would come at a time when personal financials are not known for their robustness; exemplified no better than the recent news articles covering the record number of full-time employed New York City workers who are forced to live in homeless shelters or on the street.

Should it eventuate, a shutdown next week could see almost 1 million federal workers furloughed and facing a pay deficit that would only be remedied at the discretion of Congress retroactively upon reopening. Those escaping furlough will nevertheless be legally required to work without pay, again, until the shutdown is terminated. Either scenario will see those without savings to draw upon experience difficulty.

Here are some of the ways that the already struggling US economy could be impacted by a shutdown next week:

  • Any employment or grant applications with the federal government would not be processed.
  • Holiday makers would be unable to access any federally funded tourist attractions including museums, national parks and monuments.
  • The issuance of US passports may be interrupted impacting the ability to travel for business.
  • Small businesses reliant upon government workers or tourists could see a dramatic drop in takings. This wouldn’t only include the absence of people spending money, but also accounts for businesses that may need to cease operation should they occupy part of a federal government building.
  • Federal contractors would likely experience delays with an inability to process paperwork.

In an increasingly fragile economic environment, the US Senate will be one to watch next week. In terms of the likely impact on gold, records are mixed. During the first day of the last government shutdown, gold prices dropped by about 3%. On August 2nd 2011 however, the day after the US government passed debt ceiling extension legislation, gold rallied by about 2.5% and continued to new highs. One could imply negligible effect, however considering the current backdrop of volatility it is arduous to anticipate. Regardless of the impact on precious metals, a shutdown does not convey the impression of a well-functioning system.