McCarthy has promised to bring a separate bill for the funding to Congress but, over the course of the war and the series of funding bills enabling the US to supply military and other aid, there has been a steady and marked decline in support within the Republican side of the House, particularly within the most conservative factions.
Any prolonged pause in the flow of US funds and equipment to Ukraine could have a significant influence on the outcome, reducing Ukraine’s military capabilities, undermining the commitment of the Europeans who would have to play a larger role and emboldening the Russians.
If Congress does get to November 17 without a long-term funding deal in place it will damage the US economy directly because many government agencies will be closed and workers in others, like the US military, won’t be paid. (The latter was a factor in McCarthy’s decision to strip the bill of its more controversial elements. No one wants the political responsibility and odium of leaving military men and women unpaid).
In previous shutdowns the levels of absenteeism among unpaid workers spiked and airports and travel, among other sectors, were noticeably affected.
Economic data wouldn’t be released, the Securities and Exchange Commission wouldn’t be able to perform most of its functions, national parks would be closed and some agencies the private sector relies on for routine assistance would be closed.
Goldman Sachs analysts have estimated that there will be a loss of 0.2 per cent of US GDP for every week that a shutdown lasts and, while much of this would be recovered when the shutdown ended and federal employees received their back pay, the level of dysfunction with the Republican Party and therefore in Congress is such that any shutdown this year could be prolonged and the impact on the economy more severe than in previous episodes.
There is a disruptive minority within Congress and others outside – like Donald Trump – who appear committed to make America as difficult to govern as possible.
The threat of a shutdown, that dysfunction in Congress, disenchantment with the Biden administration and the bitterly partisan nature of US politics, may be one of the several influences that caused the US sharemarket to slump five per cent last month.
The rise in bond yields is probably the more dominant of those influences – the 10-year bond yield rose about half a percentage point last month to a 16-year high of almost 4.6 per cent – and a surging oil price would be another significant factor.
With the markets brittle and the US Federal Reserve Board signalling that US interest rates will remain higher for longer even as there are some signs of stress, not just in equity and bond markets but within the commercial real estate sector and some of the more highly-leveraged debt markets, the inability of Congress to function represents a threat to the US economy.
Those waging the civil war within the Republican party room – the hardcore fiscal conservatives and MAGA adherents – don’t appear to have a particular or consistent agenda other than opposing centrist policies, although in some cases they appear driven by self-aggrandisement and in others to remain on the right side of Trump.
They forced McCarthy to seek, and begrudgingly receive, Democrat support for the temporary government funding; support that won’t be there if he comes back with more big spending cuts and aggressive border security proposals as the price of keeping the government operating.
For the past year and a half the big risks to financial markets and economies have been interest rate risks as central banks have combatted the post-pandemic inflation break-out, the increase in geopolitical tensions as the US and its allies have become wary of China, its ambitions and their reliance on it for critical products and the flow-on effects for economies and markets, particularly energy and food markets, of Russia’s invasion of Ukraine.
To those, we can now add the political, financial and economic risks emanating from an increasingly shambolic US governance system.
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