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Global Fears Grow Over US Shutdown

Global Fears Grow Over US Shutdowni
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October 04, 2013 12:07 AM
There are new worries about the consequences of the U.S. government shutdown. The Treasury Department says failure to reach a deal on the country’s financial obligations, including the debt ceiling, could plunge the U.S. economy into a recession. On Thursday, the International Monetary Fund said that, without a deal soon, the ongoing fiscal problems of the United States could drag the rest of the world with it. Mil Arcega has more.
There are new worries about the consequences of the U.S. government shutdown.  The Treasury Department says failure to reach a deal on the country’s financial obligations, including the debt ceiling, could plunge the U.S. economy into a recession.  On Thursday, the International Monetary Fund said that, without a deal soon, the ongoing fiscal problems of the United States could drag the rest of the world with it.

The economic cost of the country’s first government shutdown in 17 years is staggering. One estimate pegs the daily losses to businesses, tourism and lost wages at $300 million a day - or $1.6 billion each week..

And that’s just the shutdown.  The bigger worry is a possible impasse over the government's debt ceiling.  

IMF Managing Director Christine Lagarde:

“The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse and could very seriously damage not only the U.S. economy but also the entire global economy," she said.

If lawmakers don’t reach a deal to raise the country’s $16.7 trillion debt limit, the Treasury Department says the U.S. will run out of money to pay its obligations by October 17.  

If that happens, investors would lose faith in the U.S. economy, the value of the dollar would plunge, interest rates would soar and unemployment would rise.

That's the worst case scenario - but one that grows more probable each day the shutdown continues.  

Tony Crescenzi is an investment manager at Pimco.

“It is a serious matter, defaulting.  And markets, while they assign a very low probability and so would we, are starting to worry a little bit because of the lack of getting together, the acrimony that exists in Washington," said Crescenzi.

On Wall Street, the stock sell-off intensified Thursday, after Republicans and Democrats emerged from a White House meeting no closer to an agreement than when they started.

Adding to the frustration,  the Labor Department says monthly job numbers,  an important indicator of U.S. economic health, will not be released as planned on Friday.
 
Without that data, Stan Collender, the head of the financial communications firm Qorvis, says the Federal Reserve is now more likely to delay plans to scale back its monetary stimulus.

“The lack of a jobs report probably freezes the Fed in place, unless they’ve got their own information and they may very well have what would indicate what the jobs report might have been," said Collender.

Given the likely financial impact of the shutdown, Collender says keeping the stimulus in place is a good thing.  But the daily uncertainty carries a heavy price for U.S. businesses. Retailers are worried that a prolonged shutdown could make consumers anxious.  Consumer spending accounts for about 70 percent of the country’s economic output.

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