It’s a shutdown

In the news yesterday, Donald Trump aka Mr Orange, was back at it again with his build-a-wall solution to America’s immigration issues. This time taking an even stronger stance, threatening to literally shut-down the US government if congress won’t approve funding for his wall. On the back of this news, the stock market in the US fell, as a government shut-down is a pretty serious thing. So what is it, how does it relate to finance and what does it mean for you?

What is a government shut-down
When the President and Congress cannot get agreement on the budget for the American economy, one or the other of them have the ability to literally shut

the government down. How do they do that? By turning off supply, which effectively means they stop paying government employees’ salaries. Now if you’re not earning a salary, you’re not going to work. And in this case it’s the governments work….. You know, police, council workers, welfare centres, regulatory agencies, the military. Sort of important stuff.

Is it a big deal?
Only if you’re an American. Well, kinda. But not really.

Believe it or not, the US Government has been “shut-down” on multiple occasions over the years. 18 times in fact and most recently back in 2013 when Obama was President. Back then, Obama couldn’t get congress to approve his Healthcare bill “for the people”, and the government was promptly shut down for a full 16 days while they worked it out. That’s a long time to go without earning a salary. You know those highly overpaid guesstimators we talked about yesterday? They reckon that shut-down cost the United States about 24 billion dollars. So yeah, it is a bit of a big deal.

Finance and you?
The reality is, now Trump has started the conversation of a government shut-down, it’s going to get people really nervous. Nervous because the government may actually get shut down and nervous because if it does, no one knows how long it could get shut down for. When people get nervous about stuff like this, it often makes them less inclined to spend money. It’s a weird behavioural thing, but it’s true. And if people are nervous to spend money, that’s bad for business. And things that are bad for business are bad for profits and things that are bad for profits are bad for stock prices.

And remember, Americans don’t just buy American things. They buy things made and done by companies all over the world. US people account for about 25% of ALL SPENDING in the world. So when they stop spending, it has impacts on businesses everywhere, including here.

Short term vs Long term
In the end, an agreement will come. Because it always does. And things will go back to normal. But in the short term, expect to be reading a lot about this threat of a US Government Shutdown. It will dominate the financial media until it is sorted and more likely than not. Yay.

Got a finance question, but short on time? Send us an email at daily@5minute.finance and we’ll help you out

 

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