News from the United States capitol once again dominated headlines. Racing against the clock, and with a 14-day partial government shutdown threatening to continue, the Senate’s Democratic and Republican leaders worked to avoid a potentially economically catastrophic default by the U.S. Treasury.
Senate Majority Leader Harry Reid declared “[w]e’ve made tremendous progress,” after intense negotiations with Senate Republic Leader Mitch McConnell and others. Although McConnell also expressed optimism at the possibility of a deal, dissenting House conservatives took little solace in a potential resolution.
The basic framework of the proposed terms allows for the $16.7 Trillion debt limit to be raised, allowing the Treasury to borrow as usual until mid-February. The government itself would re-open and have adequate funds to function until mid-January.
However, any legislation would require approval by the Senate and also the House, where a large contingent of Tea Party- associated policymakers caused the shutdown two weeks ago, despite efforts from both McConnell and Republican Speaker John Boehner. The House believed that restricting broad federal spending legislation to a specific proposal would starve Obamacare of funding. With President Barack Obama resisting re-structuring of his three year old health care law, polls have shown a clear drop in public support for the Republican Party.
In the meantime, the prevalent attitude internationally is that the U.S. must not allow a default. Christine Largarde, Managing Director of the International Monetary Fund (IMF), spoke with trepidation, warning of “a risk of tipping, yet again, into recession.”
In my opinion, and as a number of pundits and economists have already pointed out, the shutdown and the resulting negotiations have less to do with economic harm reduction, and more with political posturing. The problem is that since the Republicans in the House bet on using the threat of the shutdown – and now the threat of default – as a method of seeking capitulations on Obamacare, anything less than a re-structuring would appear as a failure in the eyes of their supporters and party base. On the other hand, the President has no choice but to refuse any significant changes to health care funding, as the popular name for his legislation, Obamacare, is his legacy – it is what he will be remembered in the annals of American history for. The current state of affairs favours the Democrats and the President, as the American public is growing tired of the shutdown and is not differentiating between Tea Party supporters and moderates; the finger is being pointed at the Republic Party as a whole. This means, if the Treasury defaults, and the United States is once again plunged into a recession, the public has an obvious culprit. In Canada, although the shutdown has forced Interest Rates to remain fairly static, the potential for near- and long-term declines in the economy far outweigh any benefits. The United States accounts for over 70% of Canadian trading, and a disruption of this would be catastrophic to the domestic economy.
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