The Government Shutdown Looms: A Q&A On What Happens Next (And Who Stays At Home)

Tyler Durden's picture

With a government's October 1 shut down - temporary of course - now seemingly inevitable, and more importantly with the peak debt ceiling negotiations due in just about a week after which point the Treasury will run out of money, many wonder what comes next. That this is happening just two short years after the dramatic August 2011 debt ceiling impasse, when the market tumbled 20% and likely slowed economic growth is still fresh in everyone's mind, is hardly helping matters. Add a potential political crisis in Greece and Italy, and suddenly a whole lot of unexpected variables have to be "priced in."

Courtesy of AP, here are questions and answers about how the two standoffs, now intertwined, could affect the economy and financial markets:

Q. What exactly will happen within the next days and weeks?

A. The most urgent deadline is for Congress and the White House to agree to keep funding the government after the current budget year ends Monday. Otherwise, some of the government would have to shut down. The House and Senate are considering bills to fund the government past the deadline. But House Republicans want to cut off funding for President Barack Obama's health care law as a condition of passing the spending measure. Senate Democrats and the White House have balked. Unless one side essentially blinks, a partial shutdown of the government will occur.

Q. What would be the effect on the economy if the two sides miss the deadline for passing the spending measure?

A. About one-third of the government will shut down. About 800,000 of about 2.1 million federal employees will be sent home without pay. National parks will close.

NASA will continue to keep workers at Mission Control in Houston and elsewhere to support the International Space station, where two Americans and four other people live. Aside from that only about 3 percent of NASA's 18,000 workers will keep working.

The military and other agencies involving safety and security would continue to function. These include air traffic controllers, border patrol and law enforcement officers. Social Security, Medicare and veterans' benefits payments would continue, but there could be delays in processing new disability applications.

A partial shutdown that lasts no more than a few days wouldn't likely nick the economy much. But if the shutdown were to persist for two weeks or more, the economy would likely begin to slow, economists say.

Extended closures of national parks would hurt hotels, restaurants and other tourism-related businesses. Delays in processing visas for overseas visitors could interrupt trade. And the one-third of the federal workforce that lost pay would cut back on spending, thereby slowing growth.

A three-week shutdown would slow the economy's annual growth rate in the October-December quarter by up to 0.9 percentage point, Goldman Sachs estimates. If so, the growth rate next quarter would be a scant 1.6 percent, compared with the 2.5 percent that many economists now forecast.

The contingency plans for various government agencies are available at http://www.whitehouse.gov/omb/contingency-plans .

Q. What about the federal borrowing cap? First of all, what is it?

A. It's a legal limit on how much debt the government can pile up. The government accumulates debt two ways: It borrows money from investors by issuing Treasurys. And it borrows from itself, mostly from Social Security revenue.

Q. What if Congress can't agree to raise the cap in time?

A. It could be disastrous. No longer authorized to borrow, the government would have to pay its bills only out of the revenue it gets from taxes and fees. This would force the government to immediately slash spending by 32 percent, the Bipartisan Policy Center estimates. Most analysts think the government would delay paying each day's bills until it had accumulated enough money to pay them all.

Even worse, the government could miss interest payments on Treasurys, triggering a first-ever default by the U.S. government. U.S. Treasurys are held by banks, governments and individuals worldwide. Ultimately, a prolonged default could lead to a global financial crisis.

At the same time, Social Security and other benefit payments would be delayed. Government contractors might not be paid and would likely lay off workers. Paychecks for military personnel could be delayed.

The government actually reached its borrowing limit back in May. Since then, the Treasury has taken a variety of measures to avoid exceeding it. But the cash generated by those measures will run out sometime between Oct. 22 and Oct. 31, the nonpartisan Congressional Budget Office estimates.

The date isn't exact because it isn't possible to foresee precisely how much revenue the government will receive and when.

Q. Will the economy escape harm if both deadlines are met?

A. Probably. But even brinksmanship can have consequences. The last major fight over the borrowing cap, in the summer of 2011, wasn't resolved until hours before the deadline. Even though the deadline was met, Standard & Poor's issued the first-ever downgrade of long-term U.S. credit. That, in turn, led to a 635-point plunge in the Dow Jones industrial average the next day.

In August that year, consumer confidence plummeted to its lowest level since April 2009, when the economy was in recession. Spending at retail stores weakened.

"The fallout nearly caused the fragile economic recovery to stall," says Mark Zandi, chief economist at Moody's Analytics.

The International Monetary Fund estimated last month that U.S. budget disputes, like the 2011 showdown, can slow annual growth by up to 0.5 percentage point in other parts of the world.

The Government Accountability Office later estimated that just the threat of default escalated the government's borrowing costs that year by $1.3 billion, or about 0.5 percent.

The drawn-out fights can cause Americans to delay major purchases, such as for cars or appliances, says Ethan Harris, global economist at Bank of America Merrill Lynch. And they can erode confidence in the United States as a place to do business. Employers become less willing to expand and hire.

On Friday, the U.S. Chamber of Commerce, the National Association of Manufacturers and several other business groups urged Congress to fund the government and raise the borrowing limit.

"It is not in the best interest of the employers, employees or the American people to risk a government shutdown that will be economically disruptive and create even more uncertainties for the U.S. economy," the groups said.

Q. All this sounds pretty scary. Why aren't financial markets panicking?

A. Stock prices have fallen in six of the past seven days, partly because of the looming deadlines. But the price declines have been modest. Many investors likely feel they have seen this movie before and know how it ends: with another last-minute deal.

"After several rounds of fiscal brinksmanship ... markets may be somewhat desensitized to the headlines," Alec Phillips, an economist at Goldman Sachs, wrote in a note to clients.

* * *

And for those government workers curious if they will or won't be working on Tuesday in case of a shutdown, the following primer from the NYT answers that question:

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Oldballplayer's picture

The market hasn't panicked because they all know the drama is just bullshit.

If they "really" defaulted, the markets would melt. But that won't happen.

Xibalba's picture

I'm more concerned that Walter White is gonna get shutdown 

Arius's picture

just a bit more (a tiny) doom and gloom ...

"Russia, Iran, Damascus may crank up border tensions to weaken Netanyahu’s hand in America"

Pool Shark's picture

 

 

 

 

Shutdown? Nope. This time the Republicans have announced their surrender before the final battle even began:

http://www.nationalreview.com/corner/359829/kevin-mccarthy-house-will-send-third-volley-senate-if-reid-rejects-last-nights-bill

Told ya the Repugs would cave.

Same as it ever was...

 

 

12ToothAssassin's picture

Ive got my popcorn but at the same time Im prepared for the same old STHF blueballs.

knukles's picture

Looking at the NYT's chart, I say that there'll be no fucking loss with thems gonna be furloughed, furloughed.
In fact, just might be a good thing.
Showing the sheeple, by real time example, that the federalies gubamint is just plain too damned big.

And PS... During last night's debate, one of the Dumbocraps said that with the National Parks and Federal Lands closed, that many people wouldn't be able to hunt...  And the cocksuckers want to limit firearm...

And PSS  Mark Zandi is an asshole (Somebody told me that, BTW) Just passing it on.

And PSSS  Vera won last night.  That Chavez got the decision was a thrown fight.
Just like gubamint.

Stackers's picture

Lets see "shutting down" 1/3 of the government = disaster

We need to cut the government by 1/2

hmmm ...... Houston we have a problem

jbvtme's picture

how do we keep the government shut down permanently?

Harbanger's picture

The US Govt has already been shutdown 17 times in the past 40 years, this time won't be any differfent.

Manthong's picture

well, maybe the interesting info is that at this specific instance in time..

no fed worker.. including the .mil has a more than a dime or two in their pensions..

but  no sweat..  it will be replaced with great new bernanke, yellen or whoever fiat of this great nation

wintermute's picture

For f**kssake. What kind of madness prevails that means this is a disaster?

"It could be disastrous. No longer authorized to borrow, the government would have to pay its bills only out of the revenue it gets from taxes and fees."

Anusocracy's picture

Most people want to save government so it can continue to destroy the economy.

A small number of people want to destroy government to save the economy.

It is easy to see why the progress of civilization is so damn slow.

The Heart's picture

"Showing the sheeple, by real time example, that the federalies gubamint is just plain too damned big."

Gracious greetings Knuck.

This report is like predicting the weather. It is ALWAYS different than what they say it will be. Bet ya our Tylers might offer a more realistic report based on what might REALLY HAPPEN as this distraction unfolds.

And, you are right. Not missed all. What was blaringly missing was, the IRS, the NSA, the CIA, the FBI, the TSA, and not to forget the american gestapo, the homeless insecurity thugs, and other assorted black-shirts.

One has to wonder if the "contractors" (al-cia-duh) will be part of this cut. Maybe, this is why the soterobama wants to make peace now with Syria and Iran. He has finally run out of American tax payer dollars to pay his private al-cia-duh army with, and the REAL American Military have said screw you and your wars based on lies for the banksters that send us all to wars to die for their profits, and world domination plans.

Hummm...go figure.

 

 

Zymurguy's picture

yeah, that list looks like a good start and should be a permanent one!

Quick, while the gov't is shut down it'll be a perfect opportunity for our military to initiate a coup to re-secure the founding principles of this nation.

Harbanger's picture

Shut it down and put a lid on it.  Unfortunately it won't really shut down until they go bust.

Zer0head's picture

without doubt, there will be an 11th hour cave and we can look forward to a live feed of Barry proclaiming victory whilst delivering blow after blow to the extremist members of the house (aka Tea Party) as Boehner weeps (with joy) in the background

 

 

Headbanger's picture

The shutdown will happen and should happen to help stop the lunacy of an ever increasing government control over everything and everybody. Federal taxes should be suspended as well for the duration of the shutdown because after all, there's no government!  Like that will ever happen..

In fact, I think there should be a "National Do Nothing Day" or even week where nothing is done so people can just relax

ebworthen's picture

Government relinquish control?  Their banker masters cannot accept that, nor can government.

People relax?  Not sure they would if they had the chance, but if they did most would go mad when they realized the real situation.

That's why you have the ever increasing pace and stream of images, noises, and messages; keep the wheels spinning.

Mister Ponzi's picture

"Q. What if Congress can't agree to raise the cap in time?

A. It could be disastrous."

It won't be disastrous and herein lies a big chance. When people notice how little it really matters to their lives if their government shuts down, the pendulum may finally start swinging back in the direction of a free society.

Rubbish's picture

Ah heck, I don't collect a Gov. check or handouts, never called a cop, break laws on occasion when nobody is looking, helped a few little old ladies cross the road, haven't seen a justifiable war since...well, never, and I'm almost 60.

 

I need the Government why? I won't miss them.

CH1's picture

Precisely, Rubbish. May they shut down and forget how to restart!

FreeNewEnergy's picture

Roger that, CH1. Shut it down and welcome to the brave new world of anarchy, which has gotten a bad name, mostly from big government types. Every man and woman free, responsible for the welfare of his or her own family, without intrusion, interruption, taxation or regulation from government of any kind.

I'm all for that and willing to help out those who deserve help (lazy welfare cocksuckers can go die now, thank you).

 

Signed,

Single, 59, free and responsible in New York (now if we can just get rid of that Cuomo communist)

Debt-Is-Not-Money's picture

"(now if we can just get rid of that Cuomo communist)"

I thought all Italians are Fascist, oh well...(still totalitarian).

Bunga Bunga's picture

Remove all the direct and hidden taxes and suddenly everyone is able to pay doctor bills, so who needs Obamacare after a government shutdown?

moonstears's picture

I Might want some bullets, before that anarchy thing goes down(not that it's "chaos", but that the idea that you can generally " trust thy neighbor " in an event as such needs to be intimately pondered. JMO)

moonstears's picture

You also don't speak German, and though most of the guys who made that happen are no longer with us, their modern "descendants in arms" are why we need (limited, agreed) Govt.  

Anusocracy's picture

People are free to choose their own religious belief systems.

Since government is a belief system with no proof of efficacy, each individual should also be free to choose which government, or none at all, if they prefer.

Anything else is tyranny, which is what we have now.

Keyser's picture

The Dems are running Hitler's gameplan, just another era. 

 

Yes We Can. But Lets Not.'s picture

Oh, didn't you hear, we need a World Gubmimt to save us from the weather...

max2205's picture

Acfual default on bonds....no

 

Actual prolonged shutdown...one can only hope

Robslob's picture

It all depends on 1 simple thing:

How many Congressional Critters are still in the market, if the majority are then they will pass anything.

If all of them have their investments on the sidelines it is a guaranteed Government Shutdown.

 

It is all and ONLY about their money...everyone else is Welcome to Fuck Off!

BurningFuld's picture

You guys need a constitutional amendment. No budget = instant election. Bye bye dipshits!

Theosebes Goodfellow's picture

~"In August that year, consumer confidence plummeted to its lowest level since April 2009, when the economy was in recession. Spending at retail stores weakened.

"The fallout nearly caused the fragile economic recovery to stall," says Mark Zandi, chief economist at Moody's Analytics."~

 

What absolute bullshit. The "fragile economy" exists right now mostly due to govt. spending driven by debt creation. Stop creating debt, let the chips fall and get rid of 1/3 of all govt. The folks back home will get along just fine as long as they aren't the ones on the govt. teat. The ones on the dole will have to go out and actually work for a living, as will the govt. drones who lost their cushy govt. jobs.

yogibear's picture

"the markets would melt. But that won't happen"

Exactly! The bankster cry babies (credit and debt) want more and more candy.

Money Maker's picture

I like the ending of the post "All this sounds pretty scary. Why aren't financial markets panicking"

 

The market can’t short it - it’s very dangerous to your health, considering Ben Big Bucks Bernanke has made it clear that he will print whatever billions of dollars per month the bankers need.  In addition, the US Treasury will borrow, rob, lie and manipulate whatever money and data needed to prevent a market correction.

Tim_'s picture

"Even worse, the government could miss interest payments on Treasurys, triggering a first-ever default by the U.S. government."

Back in the 1980s, some people were getting 19% on their bonds, so the government decided to stop paying. That was a default.

hivekiller's picture

They won't let it shut down for long because then people would realize they don't need 99% of it. Less government = more freedom.

LawsofPhysics's picture

Market?  There hasn't a market for quite some time.  Funnny shit.

sgorem's picture

anyone know what time Dancing With The Stars comes on tonight? thanks in advance.

The Alarmist's picture

Uh, I dunno ... I tune in to see what's happening on Duck Dynasty? You know, you get some really good investing ideas on Storage Locker Wars. 

/sarc

fonzannoon's picture

no one gives a shit. If they want people to care they need to have the space station shut down and provide a live video feed of those guys running out of oxygen. Think of the ratings, the ad revenue etc. Just don't do it against the NFL.

Al Huxley's picture

Even that would only be an entertaining diversion (well except for the guys in the space station) until the next 'crisis'.  Try to think of a recent crisis that's had a media shelf-life of more than about 3 days (regardless of the actual timeframe of the event itself).

Oldwood's picture

For government, crisis is their life's blood. No noise comes from their mouth that is not a crisis. They simultaneously broadcast fear and chaos while offering themselves as the only solution. The best part is that they always readily admit that they have only flawed solutions in order to keep expectations low. Only they can save us, but only barely and always at high cost.

Keyser's picture

All they have to peddle is fear. If we stop being afraid of all the BS they push at us via the MSM, the world would be a better place. I say laugh in their bureaucratic faces and tell them to turn the lights off on the way out the door as they SHUT THE FUCKER DOWN. 

 

The Heart's picture

"All they have to peddle is fear. If we stop being afraid of all the BS they push at us via the MSM, the world would be a better place. I say laugh in their bureaucratic faces and tell them to turn the lights off on the way out the door as they SHUT THE FUCKER DOWN."

Ahoy, and roger that Keyser.

THAT!!!...was pure poetry spoken as simple truth in a perfect harmonic tune that resonates sweetly in the heart.

Thank you. It's nice to feed the heart real truth.

May the Great Light of the Most High prevail!

http://www.youtube.com/watch?v=DIaPIy4Mddg