US Senate Agrees To End Shutdown and Raise Debt Ceiling – For Now

The US Senate Agrees on an end to the government shutdown

Warren Buffett has famously said of the U.S. government shutdown and debt ceiling, “We will go right up to the point of extreme idiocy, but we won’t cross it.” That moment of truth came today, as Senate leaders managed to agree on an eleventh-hour short term solution that would reopen the U.S. government through January 15, and extend the $16.7-trillion debt ceiling deadline to February 7. Currently, both sides of the Senate are acting to pass the agreement so that President Obama can sign it into law by midnight – the deadline that marks the end of the government’s borrowing authority.

The deal means 800,000 furloughed employees will come back to work, and Republicans and Democrats have more time to hash out their differences on fiscal cliff spending cuts and Obamacare funding.

Narrowly Avoiding Economic Disaster

Should the U.S. default on its debt, it will lead to an unprecedented global economic crisis with catastrophic consequences for countries invested in the U.S. dollar and trade. For Canada, the impact will be severe, as the U.S. is the largest trading partner for our floundering exports industry. Our economic growth would slow further, possibly plunging us back into recession. While our Minister of Finance Jim Flaherty initially expressed confidence that an agreement would be reached on government borrowing, he also stated that “failure to resolve the situation in the U.S. would have global consequences.”

Has The Damage Been Done?

While the U.S. may have narrowly avoided the worst case scenario, allowing the shutdown and impasse to linger played a dangerous game with investor sentiment. Historically, the U.S. dollar is considered the “gold standard” – the benchmark that all investments, collateral and commodities are based on. Its downfall would cause the global financial system to implode. Global markets breathed a collective sigh of relief in response to the deal – markets have rallied since the news broke at noon today.

However, long term damage may have been done. The U.S. dollar’s power position could be reversed should investors rebel en masse, and become unwilling to trust the nation with their money. Already China, the largest investor of U.S. treasuries at $1.3 trillion, is furious that the government let the default possibility escalate to this extent. Should the nation sell off their U.S. treasuries, the dollar would be devalued.

Loss Of Trust Among Consumers And Credit Agencies

Consumers are also taking heed, reigning in the spending our economy so desperately needs to meet growth benchmarks. According to the Bloomberg Nanos Canadian Confidence Index, consumer confidence dropped 0.5 per cent as of October 11.

The lingering shutdown also prompted warnings of a downgrade from Fitch Ratings from the nation’s current AAA, though the credit ratings agency stated it was confident a resolution would be reached, and won’t reveal its decision until end of Q1 next year.

As a Canadian, are you concerned about the U.S. government’s next steps, and the potential impact of a debt ceiling default?

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