The U.S. is teetering on the brink of a government shutdown – and while Canadians have no need to fear the cancellation of services or a freeze on payments, American chaos poses a threat to our economy. Here’s how recent events have led U.S. policy makers into their current time crunch, and the resounding effects for Canadians.
1. What Is Happening Right Now In The U.S. Government?
Simply put, the U.S. congress is struggling to find agreement on a vital spending bill that must pass before the end of the nation’s fiscal year, which strikes at midnight tonight. Once this deadline passes it will be illegal for the government to pay for non essential services, meaning up to one million federal workers will be sent home tomorrow without knowledge of when they’ll be paid next.
The U.S. government shutdown, which will be the 17th since 1977, would end as soon as President Obama signs an agreed-upon spending bill, funding these services and the payments of furloughed employees. However, he’ll still get his paycheque, and so will the members of congress, while the government is out.
2. Why Can’t Congress Find An Agreement?
The main squabble is over Obamacare, the new national health care measure rolled out by the Obama government. The Republicans are crying foul over the cost of the program, and want to delay implementing key aspects of the plan for a year. They have refused to agree on a spending bill until these terms have been met. The Democrats, however, refuse to entertain the thought of pushing Obamacare back. Congress remains in a stalemate, with no sign of negotiations to come before tonight’s deadline.
3. What Is The Debt Ceiling?
In what could be considered almost comically bad timing, the U.S. debt ceiling issue is again at the forefront – the U.S. government will run out of money on October 17. If government is still shut down and no spending agreement reached, the nation will default on its debt for the first time in history. It’s a bad scenario, and experts aren’t sure of the exact consequences. One fear is that the government will be unable to pay back their bond investors, which would spell utter chaos for global markets and Canada’s own bond yields and interest rates.
However, it’s widely expected that a resolution and a plan will be reached before this point – after all, there’s too much on the line here, even for political egos. In fact, investors still view government bonds as safe havens; Canadian five-year yields are down to 1.88 per cent (from 1.99 per cent last week), 10-year are down to 2.5 per cent from 2.7, and U.S. yields are 1.40 and 2.62 per cent, respectively.
4. The Impact On Canada’s Economic Growth
While the drama may be taking place south of the border, Canada is an unfortunate bystander. While our economy has weathered the global financial crisis relatively well, growth has stagnated. Inflation is still below the two per cent benchmark, and there hasn’t been enough progress to warrant the Bank of Canada to reverse its interest rate stimulus efforts – we’re still very much in protection mode, with no sign of moving forward. Our export industry, an important economic driver, is still lagging and could suffer further as our largest trading partner deals with this latest challenge.
While it’s not likely that the U.S will increase their own interest rates amid all this uncertainty, global investors could also change tides and drop their bonds, driving yields back up. After all, the global markets are not known for their level headed reactions – it seems they only just recovered from all the tapering news earlier in the month.
In the meantime, all we can do is wait for congress to pull a midnight miracle.
Be sure to check back for updates!