Even before the government shutdown began on Oct. 1, experts warned that it could have a huge impact on the U.S. economy. Nearly a million federal workers have been furloughed, and the collateral damage has threatened millions more Americans who rely directly or indirectly on government-funded programs.
As the U.S. Treasury approaches its statutory debt limit, the government is essentially running out of borrowing power. The Senate has announced a potential deal that could end the shutdown, but the House has yet to vote on it. So with the announced deadline of Oct. 17 less than 12 hours away, what's going to happen if Washington isn't able to break the gridlock? Here are a few of the consequences of a continued shutdown.
1. The government will start picking winners and losers
The shutdown hasn't stopped the government from continuing to incur expenses, especially with essential operations continuing. Until now, the government has been able to fund those expenses by raising debt.
As of midnight, though, Treasury Secretary Jacob Lew has said the government would have only about half the cash it needs to fund its operations on a typical day. As a result, a lack of cash would force the Treasury to prioritize payments. Its decisions would potentially pit bondholders against Social Security recipients and defense contractors against educational institutions in what could become the highest-stakes lobbying situation ever.
2. Creative solutions could provide alternatives to federal government funding
With many of the highest-profile services that the federal government helps provide, other players are involved that could help pick up the slack. For instance, last week a group of governors successfully convinced Washington to allow state governments to fund national parks in their respective states, allowing them to reopen. Although the moves are costly for the states, the fact that the parks bring in so much revenue for their tourist industries that spending money to keep them open makes economic sense. Moreover, the bad publicity from park closures could have had a longer-term impact on local economies, as those whose trips were disrupted would have hesitated to risk that issue a second time.
How long states could afford to fund parks and other federal obligations is uncertain, though. In particular, if a debt default occurs, states would presumably stop receiving the large amounts of federal funding they typically get. That would leave them even more cash-strapped and less able to handle added burdens on their already strained budgets.
3. Earnings season would have a brand-new scapegoat
Often, companies trying to justify poor results pin the blame on things that are beyond its control. Earlier this year, many companies pointed to cold and wet weather to explain drops in revenue. This time around, though, the government shutdown could become the popular excuse.
Already, many companies have referred to the shutdown as hurting their business. Stanley Black & Decker (NYSE: SWK ) slashed its earnings guidance for the fiscal 2013 year by about 10%. Although other business-specific factors played a role in the guidance cut, the company also pointed to the shutdown as hurting growth. Linear Technology (NASDAQ: LLTC ) made a similar negative prediction in its latest quarterly earnings report, generally citing the crisis as potentially affecting its business customers and their willingness to spend money on Linear's products. It therefore projected as much as a 4% drop in sales in the coming quarter compared to its most recent quarter.
Corporate officials suggest the impact could be widespread. BlackRock (NYSE: BLK ) chairman and CEO Larry Fink has argued that a default would crush the financial markets and the economy. That could have secondary effects on BlackRock's investment business, especially given its huge exposure to the ETF market. But Fink argued that even a short-term solution wouldn't eliminate the real danger of default or all the other negative consequences of the government shutdown.
Debt is bringing the government shutdown to a head
It's hard to separate the impact of the government shutdown from the debt-ceiling debate, because hitting the debt ceiling will make the shutdown a lot worse. Even if no deal happens, the full impact of the government shutdown won't be known until well after midnight tonight.
The silver lining of the government shutdown might be that millions of Americans have finally asked how we got into this debt mess in the first place. The Motley Fool's new free report, "Everything You Need to Know About the National Debt," walks you through with step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read the full report!
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