How to Interpret the Risk of Government Shutdown?
The US federal government is once again facing the risk of a shutdown due to continuous financial concerns stemming from debt ceilings, credit downgrades, and high deficits. While the impact of default resulting from the debt ceiling is primarily emotional and unlikely to occur, a government shutdown, which frequently occurs, can have greater practical effects. Economically, if the shutdown persists for an extended period, it will exert significant short-term pressure on GDP and PMI. In terms of the market, risk assets tend to be weak before the shutdown but rebound afterward, while US bonds remain strong overall before and after the event.
What is a government shutdown?
Each fiscal year, all necessary funding for the normal operation of the US federal government requires authorized appropriations through bills. When these bills cannot be passed and government spending is impeded, some functions will be shut down. In cases where appropriations bills are difficult to pass, continued resolution may temporarily provide the government with funds to avoid a shutdown.
Which expenses and services are affected by the government shutdown?
Not all government functions are paralyzed; some essential and unrestricted functions remain unaffected but suffer indirect impacts. State and local governments do not shut down, but they may be affected by interrupted federal transfer payments. Government employees may not receive payment during their leave but will be compensated later. This wage delay could negatively affect residents' income, expenditure, and work willingness. Welfare such as unemployment benefits will be paid regularly, but new applications will be hindered. Employees of private companies that contract with the government may face temporary layoffs, leading to an increase in unemployment. During the shutdown, the government continues to pay off national debts and other forms of debt, and US bonds will not default. The Bureau of Labor Statistics lacks manpower and will see a slowdown in work, which could delay the release of economic data.
Difference between government shutdown and US debt ceiling/default
Mechanism: After reaching the total amount of US bonds, the government cannot raise additional financing. When tax revenue, unconventional means, and cash depletion are exhausted, the US government cannot fulfill its payment obligations, resulting in a default.
Scope: When the debt ceiling causes the government to default, the range of expenditure involved is more extensive, especially when it comes to US bond defaults.
Effect: In theory, since the range is wider, the impact of the debt ceiling is much greater. However, in reality, the impact of the debt ceiling's default is primarily emotional because it is unlikely to happen. A government shutdown, which frequently occurs, has a more significant impact.
Impact of Government Shutdown
Economically, if the shutdown persists for an extended period, it will exert significant short-term pressure on GDP and PMI. Financially, government revenue may decline, raising concerns about financial sustainability. In terms of the market, risk assets tend to be weak before the shutdown but rebound afterward, while US bonds remain strong overall before and after the event.
Current Situation and Outlook for 2023
Time is running out, and there is a clear partisan divide. The prospect of passing annual appropriation bills directly is dim. Even if a continued resolution is employed, it faces significant negotiation resistance, including within the Republican Party. There is a chance that the US government will shut down again, but it is expected to last only a short time.
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TH KS : Is US Treasury bond still a great investment?
Derrick Rose7 : Hope the tax rate won't rise...
Crefuthope : Now is TLT deliberately playing high low walking quotes? Interest rates continue to rise in every US stock session
Noah JohnsonOP TH KS: Good question. I might talk about investing in US Treasuries in a later post. At present, the US debt is now not only affected by inflation and monetary policy expectations, supply and demand relations also have a great impact. At present, it is recommended to buy US bonds and collect interest, but it is not recommended to buy ETFs.
Noah JohnsonOP Derrick Rose7:
Noah JohnsonOP Crefuthope: There's too much supply and not enough demand for US Treasury bonds right now. This is causing bond prices to keep dropping. I personally think that TLT is a good choice for dollar-cost averaging. We all know that interest rates can only go up so much, but we don't know when the turning point for interest rate cuts will come.
103850182 Noah JohnsonOP: Looking forward your new post