An analyst at the American Enterprise Institute: "The U.S. cannot afford a prolonged government shutdown"

At a time when foreign investors are already losing confidence in America’s political willingness to address its public debt problem, the last thing that the US economy needs is a protracted government shutdown. Such a shutdown would underline Washington’s political polarization and it would heighten economic uncertainty. Yet, such a protracted shutdown could very well occur. Indeed, Republicans and Democrats currently remain far apart on what should be done to get a stopgap funding bill approved that would allow the government to reopen anytime soon.
 

"Congress could not agree on a new budget or on a bill to keep the government open when the old budget expired at the end of September"

Beginning at midnight on October 1, the US government was shut down for want of funding. The reason for the shutdown was that Congress could not agree on a new budget or on a stopgap funding bill to keep the government open when the old budget expired at the end of September. While the Republicans do have a majority in both the House of Representatives and the Senate, approval of a funding bill would require 60 votes in the Senate which the Republicans do not have. The Republican would need at least 7 Democrats in the Senate to cross over to get a stopgap bill approved that would allow the government to reopen.
 
The Democrats have made clear that their approval of any stopgap bill would require that the Affordable Care Act be extended and that the recent Medicaid cuts in Trump’s One Big Beautiful Bill be rescinded. For their part, the Republicans are insisting on a straight up stopgap funding bill and President Trump is threatening to make permanent the furloughing of many federal government workers. This could mean that whereas in the past, government shutdowns have been short-lived, this shutdown could be of long duration. This would seem to be particularly the case since Trump might want to score political points by laying the blame for an unpopular government shutdown on the Democrats ahead of next November’s mid-term Congressional election.
 

"Quarterly gross domestic product would be reduced by around 0.1 percentage point for each week that the shutdown lasted"

Although up to 750,000 federal workers could be furloughed and many non-essential government services could be disrupted by the shutdown, the economic impact would be limited in the event that the shutdown was short lived. A generally accepted rule of thumb is that quarterly gross domestic product would be reduced by around 0.1 percentage point for each week that the shutdown lasted. However, if the shutdown were to drag on for a month or two, the economic consequences could be considerable. This would not least be due to the doubts that it would sow about Washington’s ability to bring its public finances under control.
 
A key vulnerability of the US economy is that it is currently running very large budget deficits that have to be financed to a considerable agree from foreign borrowing. According to the Congressional Budget Office, over the next decade Trump’s One Big Beautiful Bill will add around $3.5 trillion to the budget deficit. In turn, that would keep the budget deficit at above 6.5 percent of GDP for as far as the eye can see and would take the public debt to GDP ratio to a Greek-like 128 percent by 2034.
 
According to the US Treasury, foreigners own $8.4 trillion, or around 30 percent, of the $29 trillion in the total of US Treasury bonds outstanding. If the United States is to avoid a US Treasury bond and dollar market crisis, it will be essential that it maintains investor confidence that the US will meet its debt commitments without resorting to inflation. This would seem to be particularly the case at a time when not only will the US government be needing to roll over a large amount of maturing bonds but when it will also be needing to finance a budget deficit of around $2 trillion a year for many years to come.  
 

"Dollar has depreciated by 10 percent, at a time when one would have expected it to appreciate on the back of Trump’s import tariffs hike to their highest level in 100 years"

Ominously, markets already appear to be losing confidence in America’s ability and political willingness to service its debt obligations without resorting to inflation. Since the start of the year, the dollar has depreciated by 10 percent, at a time when one would have expected it to appreciate on the back of Trump’s import tariffs hike to their highest level in 100 years. Over the same period, gold prices have increased by 50 percent and US Treasury bonds appear to have lost their safe haven status in times of market volatility.
 
To date, the loss in investor confidence has been driven by the unsustainable path on which the US public debt finds itself as well as Trump’s relentless attacks on the Federal Reserve’s independence. It is against that background, that America can ill afford a prolonged government shutdown that would underline its lack of political willing to address its debt problem and that would create added uncertainty by halting the release of economic data. Unfortunately, judging by the hardening of both the Republican and Democrat’s position on agreeing to a stopgap funding bill, we could be in for a prolonged government shutdown with untoward market consequences