Why we should be worried about the US government shutdown: Analyst warns of dollar parity “by Christmas”

It now appears almost certain that United States government departments will be on shutdown from tomorrow, with Congress Republicans holding firm in their attempts to use a budget bill to defund President Obama’s universal healthcare law.

The American Senate and the House of Representatives must reach agreement by midnight tonight in order to pass the funding necessary for government departments to keep operational.

Already, international markets are viewing a shutdown as a near certainty. The Dow Futures markets opened 101 points lower: traders are pricing in a shutdown.

While an 11th-hour deal is a possibility, it’s made less likely by the fact that any compromise by Republicans from their hard-line position is likely to result in Republican Speaker John Boehner being ousted by Tea Party conservatives in his own party. They are even less likely to compromise than he is.

Any shutdown – even if it only lasts a day or two – will push the Australian dollar higher, says Evan Lucas, a market strategist at IG Markets. .

“There’s a very real possibility of reaching parity by Christmas,” he tells SmartCompany. “It’s out of our control.

“Overnight, a government shutdown would mean 800,000 federal government employees don’t get paid. That’s going to drive up unemployment, and it’ll impact confidence in the American economy. That’ll push their currency lower, and the Australian dollar higher.”

This might encourage some shoppers to doing their Christmas shopping on American websites.

Economists expect a government shutdown to shave 1.4% off fourth-quarter economic growth in America. Lucas thinks, because of the lower dollar, that’ll likely have some impact here, too.

“Imagine two or three days of a relatively high Australian dollar,” Lucas says. “That’ll distort fourth-quarter trading heading into Christmas, which is the worst time for it. Retailers need a strong quarter. But if you have confidence falling and a high Australian dollar, it’ll get back to the SME community.”

Consumer confidence in Australia is highly tied to events in America, Lucas says. Confidence has been on the mend of late, but concerns over debt ceilings and government shutdowns aren’t going to help.

However Shane Oliver, the chief economist at AMP, tells SmartCompany the effect will really depend on how long the shutdown lasts for. “If it’s a prolonged shutdown, then that obviously would have global implications for growth, including in Australia.

“At this stage though, it’s still early days.

“We’ve seen this movie before,” Oliver adds. “There have been four threatened shutdowns in the past few years. We’ve often gone to the brink, only to fall back in at the last minute.

“I expect if there is a shutdown, it’ll be a brief one. Politicians don’t want to get blamed for the crisis. But then again, US politics is more dysfunctional than it used to be.”

If American politicians avert a shutdown, they’ll likely to have the discussion again in October. The United States is scheduled to breach its debt ceiling on October 17. This will require further cuts to government spending, and if the two sides don’t agree, this could trigger an American default on its debt.

“We’re in for a fairly uncertain few weeks,” Oliver says. “Even if there’s good news late tonight, the markets will worry about the next thing. It’ll be a fairly volatile couple of weeks.”

“But I think it’ll probably be resolved in a way that doesn’t cause major harm.”

It’s been 17 years since the American government shutdown after failed budget negotiations. In 1995, House Republicans, led by Newt Gingrich, refused to pass a budget over concerns about spending on education, public health and the environment.

For 28 days the federal government shutdown, which turned public opinion against the Republicans and is credited with having helped president Clinton’s re-election campaign a year later.

The American federal government has shut down 17 times since 1976.


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