Recently, the risk of closing the federal government in the US has been on the agenda. We know that this closure has caused concern in the markets before and may now be priced negatively. For this reason, I am writing this article to inform you, dear readers.
Federal government shutdown
The US administration system is quite different from that of both Turkey and other states in Europe. In history, the state we now know as the USA was not a single state. The states of the United States today were once states. They had their own laws, they had their own currency, they even had their own central banks. However, later these states (i.e. states) merged and formed the United States of America today. Thus, a government was formed above all the provinces. It’s called the Federal government.
Today, these states can set their own laws on a number of issues. However, they often have to abide by decisions made by the federal government and laws created in the senate.
The system is basically based on what the Americans call “Check and Balance”, that is, the form of balance and control. There are many institutions and individuals in the system. However, these institutions and individuals cannot clearly dominate each other. Therefore, if a decision has to be made, the parties must compromise. Otherwise, no decision can be made.
To give an example, it took 10 years for “Obamacare” (a major health care regulation) to be passed because both the opposition and the government wanted it but could not agree on how.
In other words, since no one can dominate anyone in the system, it is possible to make decisions by compromise. The downside is that it takes a long time to make a decision; On the good side, the probability of making a wrong decision decreases as the decision is discussed and agreed upon for a long time.
So what does the federal government shutdown mean?
The federal government has to borrow money to run some business. It does this by issuing debt securities. These can be worth trillions of dollars. For example, it is planned to allocate a budget of 2 trillion dollars for the infrastructure plan that the Biden government has recently focused on. By 2035, the US economy will switch entirely to renewable energy. The reason why companies like Tesla are priced so strongly today is the “green economy”. I will address this green economy issue later in another article.
Debt Ceiling
However, the federal government’s borrowing also has a limit. This limit is debated in the Senate (our house), and Democrats and Republicans agree on a common amount. The maximum amount of debt the federal government can make is called the “debt ceiling.” If they cannot agree on a common debt ceiling and the federal government exceeds its limits, then the judges can order the federal government to be dissolved. I’m talking about pretty much closure.
All services provided by the federal government are canceled during this period. That is, all government employees (except those who provide lifeguards) are taken on leave and are not paid during this time. Employees are not even allowed to check their work-related emails. All services provided by the federal government are disrupted.
In the image below you can see the sign for a park that was closed due to the federal government shutdown.
Moreover, all federal government-funded payments, such as unemployment benefits or debt payments, are canceled until the shutdown is complete. That is, if a school is funded by the federal government and the federal government is closed, that school is temporarily closed.
Temporary unemployment occurs during this time. Federal government employees or those working in federal government offices cannot get paid and must fend for themselves until the government reopens. In the 2018 shutdown, 800,000 workers were unemployed until the shutdown was over. The shutdown took about 16 days. This shutdown cost the government $2.1 billion.
The table below provides information such as the dates of federal government shutdowns to date, how long they lasted, and how much they cost.
Of course, this also means that no payments will be made for a certain period of time for holders of US debt securities. This shutdown usually does not last very long. It has happened 10 times in US history to date. The longest of these was in 2018-2019 (Trump era) and lasted 35 days. The shortest one took 1 day (actually 4 hours).
It is possible that the shutdown of the federal government will negatively affect the markets, as it will create uncertainty. For this reason, it should be followed closely. No consensus has yet been reached in the Senate. September 30 is the last day for reconciliation. If there is no consensus, the federal government could go into a temporary shutdown. I will continue to make necessary updates for you on my Twitter address.
My friends, it’s time for analysis. In this analysis, I will talk about a risk that is very close to the markets. There is a risk of the federal government shutting down in the USA. This has happened 10 more times in the history of America. Federal government shutdown $BTC #BTC pic.twitter.com/D6QlEvnkse
— Furkan Bozkurt (@BzkrtFrkn) September 27, 2021
Disclaimer: What is written here is not investment advice. Cryptocurrency investments are high-risk investments. Every investment decision is under the individual’s own responsibility. Finally, Koinfinans and the author of this content cannot be held responsible for personal investment decisions.