The U.S. Government Shut Down

October 6, 2013
By Vlad Karpel

Just two years after experiencing one of the worst months in stock market history, the market has the possibility of reviving the period. Republicans and Democrats are continuing to fight each other while the country financially sinks. In August 2011, the debt rating for the U.S. was cut by S&P from AAA to AA+. This occurred as the debate about the debt ceiling and spending cuts was taking too long to be resolved. Ultimately it wasn’t even able to bring long-term solutions into the table.

Two years after this mess, we still have the same problem to solve. The U.S. government hit the current debt ceiling, which was held at $16.4 trillion. Now the country needs to do something quickly in order to survive without defaulting on its payments. While Democrats are pushing for a quick solution, Republicans are taking the opportunity to negotiate matters they feel Democrats  are behind, such as Obamacare.

The Legacy from The Past

When President Bill Clinton left office in the beginning of 2001, national debt amounted to $5.95 trillion, which is a little less than one-third of its current level. Back in 2001, debt was just 55% of the gross domestic product (GDP), a value that was more than safe. It could be easily repaid,  even if economic conditions deteriorated. However, during President Bush Jr.’s tenure things changed. When he left office, debt was amounting to $10.62 trillion while debt-to-GDP at the time was 77%. President Obama entered office at the peak of a financial crisis. Because of  his strong push for social programs and the strong resistance Republicans always put on raising taxes, it was unavoidable that further deterioration of government finances would result.  In just a matter of years, debt rose to the current $16.4 trillion. Debt ceilings had to be renegotiated a few times, and debt-to-GDP rose to 102%.


The Future

When all these things are considered and the consequences of the financial crisis the United States is, it becomes obvious that something needs to be done regarding the current debt level. Pretending debt isn’t a concern and that debt ceilings could be pushed infinitely higher without negative consequences certainly isn’t a wise way of dealing with the problem. Many European countries had to apply some austere policies in order to avoid the worst. It is becoming clear that America will have to do the same to some degree.The Federal Reserve won’t be able to buy Treasuries forever. At some point, interest rates will start rising and it would become increasingly harder for the government to repay what it owes.

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For the time being, we are assisting in the same war we saw in the past between Republicans and Democrats. Obama doesn’t want to see his healthcare program delayed any further and insists on keeping it as it is. However, Republicans are pressing the President and threatening with the possibility of shutting down government due to a lack of funding. The Senate voted in favor of keeping the government running  however, the House decided to allow a government shut down.

The risk of a governmental shut down is due to the fact that both the Republican and Democratic parties felt they could push blame and responsibility off on the other. However, the consequences of their inability to pick up responsibility before it is too late may end up being disastrous for the future of the USD. The international community will perceive the American dollar as weaker than it was in the past and may reclaim higher interest rates to hold Treasuries (by reducing demand). This would either push interest rates higher or tie the Federal Reserve to a QE4EVA program.

At this point it would be  best if Republicans and Democrats would find a balance, working together to find solutions rather than making the problem harder to solve by focusing only on their differences  and put an end to their fight. It is time to start looking at ways of fighting the current debt levels, That means not only cutting on some expenses, but also raising taxes. If Obamacare is to move forward, taxes will have to raise even more. There’s no other option if we want to service the debt.

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