Remember the time earlier this year, when the US debt ceiling was making headlines? If not, here’s a refresher - Kicking the Can Further down the Road. Well, that drama is back again. And our view hasn’t really changed.
What’s happening?
The US government could see a shutdown if lawmakers don’t manage to find a way to pass a funding bill before September 30 (yesterday).
How can a government shutdown?
When the government doesn’t have enough money to pay its own bills, it shuts down. This shutdown starts with non-essential parts of the government, where federal workers are asked to sit at home, and are not paid.
Why does this happen?
The shutdown happens when the US government is not able to reach a consensus on what to do with its US$ 30 trillion debt. To control the debt the US government takes, there’s a law in place (like a credit card spending limit), which implements a ‘debt ceiling’.
Whenever the government’s borrowing reaches the debt ceiling, it can (i) increase the debt ceiling, (ii) suspend the ceiling, or (iii) temporarily surpass the limit.
Till there is no agreement on this, there is a massive spend crunch, which results in curbing of expenditure, so interest payments can continue till the solution is found.
Is there reason to worry?
Not really. The US has done this nearly 80 times before. Of course, reaching a bipartisan solution, which has everyone’s agreement in place, and pleases political and realistic agendas, is difficult. But, the US pulls it off each time.
What about the markets?
You will be surprised at how non-reactive the markets have become to this. Experienced investors have seen this drama several times before and remain unfazed by it. You can safely ignore the headlines, and shift focus either to what’s happening here in India.