S&P Warns of Stock Market Crash if U.S. Government Shuts Down or Defaults

U.S. Economic Outlook Dire if Government Shuts Down

 Standard & Poor has warned of a dire outcome for the U.S. economy if the White House and lawmakers fail to reach a deal to keep the government operating and avert a default. Because of the urgency to address the flooding in Houston, the likelihood of a government shutdown is remote. When Congress returns to Washington following the August recess, it needs to vote on raising the debt ceiling and approve federal spending. The debt ceiling is the legal limit on how much the government can borrow. To borrow more, there needs to be a vote on the debt ceiling. Republicans have made it a habit to threaten a “no” vote on raising the debt ceiling without achieving a number of significant cuts to discretionary spending. If the debt ceiling doesn’t get raised, the government will be forced to shut down and default on its loans—which, of course, would have catastrophic economic ramifications. The U.S. Treasury has said the debt ceiling must be raised by September 29 to avoid a government shutdown.¹ According to Standard & Poor’s, a default would be worse than the collapse of Lehman Brothers in 2008 and the U.S. would fall back into a recession, wiping out the economic progress and stock market gains seen since the Great Recession ended in 2009. A government shutdown, while less devastating than a default, would still be detrimental to the U.S. economy. Shutting down the government would erase 0.2% or around $6.5 billion from the gross domestic product each week in the fourth quarter, or for as long as it drags on. Shutting down the government would also mean no government paychecks go out, lost business, lost consumer spending, and fewer taxes collected by Uncle Sam. Because of the devastation of Hurricane Harvey and the urgent need for federal disaster relief, though, many think Washington will not shut down. But there is a wrinkle in the story. At a rally in Phoenix in mid-August, Trump promised to build a wall along the Mexican border even “if we have to close down our government.”² Ironically, Republican lawmakers have said they want to fund part of the down payment for the border wall with Mexico by siphoning nearly $1 billion from the Federal Emergency Management Agency’s disaster-relief account.³ With the streets of Houston flooded and tens of thousands of Texans in temporary shelters, the idea of taking $1 billion from federal disaster coffers (which currently hold just $2.3 billion) to fund a wall does not exactly look good. It’s not off the table, though. According to a recent survey, over half of Republican voters said they would support shutting down the government to force Congress to fund a U.S-Mexico border wall.⁴

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1. “S&P warns of dire impact on U.S. economy from any shutdown, default,” Reuters web site, August 30, 2017; https://www.reuters.com/article/us-usa-economy-s-p-idUSKCN1BA2CT.
2. “Trump’s Speech Phoenix,” The Washington Post web site, August 23, 2017; https://www.washingtonpost.com/video/politics/watch-trumps-full-speech-in-phoenix/2017/08/23/9eeb9d50-87d5-11e7-96a7-d178cf3524eb_video.html?utm_term=.530eba73b04d.

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