US government 'shutdown': what it means for you

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Shutdown

At the beginning of the month the US government officially shut down. Republicans and Democrats couldn't agree the annual budget. Specifically Republicans would only pass it if it included measures to derail President Obama's healthcare plan - Obamacare. Democrats refused to pass anything that endangered the plan.

The stalemate ended in a shutdown. So what is it, and will this affect you?


For Americans

The shutdown basically means that those people in government jobs that are considered essential will continue to get paid - so parts of government will stay open.

Initially just under a quarter of government employees - those not considered essential - were sent home. However, the defence department changed its interpretation of the word essential, so just 400,000 people remain at home. The government has also passed legislation that means these workers will eventually get paid for this period.

For Americans it means that the military will continue to fight and the mail will still be delivered, but there are all sorts of agencies - helping victims of domestic violence, carrying out experimental medical treatment, arranging federal loans for people to buy a house, and a host of other things - which have been forced to shut down.

The effects have been felt in the markets slightly, where the dollar has fallen to almost an eight-month low, and stocks have fallen 3% from their all time high. Out in the economy, there's undoubtedly a hit to consumer confidence, and there will be a drop in growth figures to reflect the fact there are almost half a million people sitting at home. However, at the moment there's no real panic.

For tourists

Tourists have been thwarted by the fact that sights like the Statue of Liberty and Alcatraz are closed. The National Zoo, 19 museums and art galleries, and services at the national parks are also closed. If you are planning a trip it's worth searching out any attractions you plan to visit in advance and check if they are affected.

However, on the flip side, UK tourists are benefiting from the fact that the dollar has fallen against the pound, and is likely to continue to do so while the shutdown drags on.

17 October

If things aren't resolved by 17 October, the situation is going to get very much worse. At this point President Obama needs to raise the debt ceiling or he'll run out of money. If the government is still in shutdown, he can't do this, and it will hit everyone. Essential government staff would not be paid, social security payments wouldn't go through, and the government couldn't pay interest on its debts.

This would have a devastating impact in the US. It would also damage UK investors.

Hargreaves Lansdown's Head of Research, Mark Dampier, points out that US government debt (or bonds) are currently considered the world's safest investment. If they couldn't pay the interest on them "there has to be a huge knock-on effect around the world."

Bond markets tend to follow trends in one anther, so this could hit any government bonds you own anywhere in the world. If you have a bond fund investment it may well lose value. If you have any sort of pension scheme some of this is likely to be held in bonds, so this fall would affect you.

Meanwhile Dampier says shares would be hit too. he says: "I would expect shares to fall but by how much I don't think anyone has a clear idea." Russ Koesterich, Chief Investment Strategist for BlackRock, is more negative, saying: "In the unlikely event that Washington fails to raise the debt ceiling, stocks would likely suffer a much more pronounced pullback." This means that any shares you own - whether an individual share, shares held in an investment fund, or as part of your pension - could take a hit. And because of the interconnections of markets around the world, we can expect UK shares to fall too.

What should you do?

However, Dampier says we shouldn't necessarily panic. He points out that: "In reality no one believes this will actually happen. The market is betting on a last minute deal at five to midnight so at the moment I am sure the volume of shares being traded, particularly in the States, is tiny as I believe the market is expecting a rally once the deal is done." Dampier suggests that "Those with a five year view should just put on their tin hat."

John Greenwood, Chief Economist at investment firm Invesco has said that it's 'inconceivable' that the politicians would push one another into such dangerous territory. He says they understand the lasting damage it would do to the reputation of the country, so a compromise will be reached.

David Harris, Head of US Multi-Sector Fixed Income at Schroders says this may not be a lasting compromise, but a series of agreements to tide them over and meet all their obligations - so workers will be paid and the government will not default on interest payments.

Even if no deal is done, the knock-on effects aren't straightforward to predict. Rather than bonds collapsing, Damper points out that some bonds could actually benefit, as investors pile into "the next safest thing."

So in a nutshell, so far, the shutdown has hurt the US a bit, but as long as it reaches an agreement by 17 October, it'll bounce back soon. All the experts agree that the stakes are so high that an agreement will be made by 17 October. We only need to worry if, against all expectations, all the experts turn out to be wrong.