Shutdown Looms

Lawmakers must reach a deal within the next four days to avoid a shutdown, which would have serious consequences for the economy.

The US government will shut down on September 30 unless agreement is reached.

Unless a deal is reached in the next four days, the US government will shut down, resulting in significant economic pain being inflicted on federal workers and the country as a whole.

The issue at stake is the controversial compromise deal reached by Congress earlier this year. Although lawmakers on both sides of the House reached agreement, a small group of hard-line Republicans are now pushing back and demanding further concessions.

A Divided House

US politics has become increasingly polarized in recent years, with Republicans and Democrats finding less and less common ground. In particular, relatively small groups of Republicans have been able to drive the agenda, making it harder than ever to find consensus.

Those renegade Republicans, of course, have another perspective to their more moderate colleagues. Chip Roy argues that this week's shutdown has roots in the COVID shutdowns, which prompted money printing on an unprecedented scale, and resulted in the high inflation with which the country is now struggling. At the same time, a lack of border control and subsidies that primarily benefit the already wealthy are swelling government spending. The mechanisms used to approve spending mean there are no brakes, or systems of control, meaning the dissenters have few tools other than such drastic action to revisit spending decisions.

A shutdown would mean that millions of federal workers would go unpaid, and many government services would be paused. This would necessarily bring serious problems to those living from paycheck to paycheck, and have a secondary impact on local economies that rely on these workers' money (for example, towns near military bases).

Previous shutdowns have also had noticeable, if short-lived, effects on the market. In this case, there is the additional likelihood of a ratings downgrade, reflecting the ongoing difficulties in passing legislation.

Record Spending Deficits

While the current impasse may seem extreme, so is the scale of the problem facing Congress. America's National Debt stands at over $33.1 trillion. Meanwhile, the Deficit is forecast to be around $2 trillion for fiscal year 2023 (which ends on September 30). That's around twice the deficit for 2022, with higher interest rates, lower tax revenues, and high inflation (resulting in higher Social Security and Medicare costs) contributing to the number. 2020 saw a record deficit of $3.1 trillion, with $2.8 trillion recorded for 2021, due to measures taken during the coronavirus pandemic.

Now, with COVID in the rear-view mirror, and the US economy apparently doing better than expected, Republicans are deeply concerned that spending remains so unsustainably high. Of particular concern is that interest rates are at a 15-year high of 5.25%, with a commitment from the Federal Reserve to hold them "higher for longer" to bring inflation back to target. This has significantly increased payments on the national debt. Yields on 10-year bonds are now 4.5%. In 2020, they were less than 1%. Yields have more than doubled in the last 18 months.

Last Chance Saloon?

Accordingly, a number of Republicans are seizing an opportunity to address the problem, no matter what the impact on the country. Donald Trump, who still holds significant influence over the party, and appears to be their best hope for the 2024 election, advocated for shutdown on his Truth social media platform.

"UNLESS YOU GET EVERYTHING, SHUT IT DOWN!" he demanded to Republicans in a subsequent post. "It’s time Republicans learned how to fight!"

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