America has two weeks left until the cash runs out

The calm response in the financial markets to the US government shutdown on Tuesday, the first since the Clinton administration, suggests investors see the latest budgetary stand-off as little more than another ugly political spat between Republicans and Democrats in Washington.

But, as the shutdown continues, with the warring factions dug in, concerns grow that the stalemate might not be resolved by the time the US runs out of cash less than a fortnight from now – on Thursday, October 17th – and that a bitterly divided Congress might not be able to agree an increase to the US borrowing limit.

Failing to raise the so-called debt ceiling would mark the first time that the US has defaulted on its loans and could transform an unseemly domestic political dispute into a global economic crisis.

"The debt ceiling is a thermonuclear explosion compared to the [shutdown's] hand grenade," Jon Huntsman, a former Republican presidential candidate, told US news channel CNN.

All-or-nothing fight
Republicans in the House of Representatives, pushed by the far-right Tea Party conservatives in their ranks, have turned once-routine Congressional deliberations on a short-term budget funding for government and an increase in the debt ceiling into an all-or-nothing fight to bring down Obamacare.

Obama’s flagship healthcare law extends health insurance to about 30 million uninsured Americans who previously could not afford it or could not be approved for it because of pre-existing conditions.

Republicans, many of whom were elected on an anti-Obamacare ticket after its passage in 2010, claim the Affordable Care Act is unaffordable, unpopular with the public and should be ditched.

Hard-line Republican congressman John Fleming from Louisiana described it as "most dangerous piece of legislation ever passed" and the "most existential threat" to the economy since the Great Depression

House Republicans forced the government shutdown by insisting that any budget include provisions to delay or ditch the healthcare law. Democrats refused to allow a budget pass with such conditions.

Far-right House Republicans, who oppose most government spending in general, recognise the greater leverage to be used from threatening a debt default with the ensuing financial calamity that would follow if the world’s largest economy could not pay for the cost of running itself or its creditors.

Small beer
Government shutdowns are not new in the US – there have been 17 since 1976 – so their cost can be largely quantified. The cost of a US default is not.

The last shutdown, continuing for a record 21 days over the 1995-1996 new year, cost the government $1.5 billion (€1.1 billion) – about $2.1 billion in today’s money. This time around, it’s estimated to be costing about $300 million a day, research firm IHS said. Goldman Sachs estimated that a three-week shutdown could shave about 0.9 per cent off US GDP of $15.7 trillion.

This is small beer compared with the cost of a default. Market analysts are watching the shutdown in the context of whether it increases or decreases the chances of a default, a scenario that would mark an unprecedented escalation of the long-running budgetary disputes between Democrats and Republicans.

The US government has been in a state of dislocation for some time. Since 2009, it has funded itself through short-term funding measures, known as continuing resolutions.

Given the growing divisions, particularly ahead of primary elections where Republicans face potential challengers from the right for their House seats as Obamacare is rolled out, this makes the process of governing uncontrollable. Agreeing temporary budgets at regular intervals becomes more difficult each time.

“When it comes to Congress paying its bills, we cannot be a country that is lurching every two months or three months from crisis to crisis to crisis,” Obama said on Monday.

But this is what has become of the process of agreeing a budget in a country whose currency is the cornerstone of global commerce. Last-minute deals to broker short-term budgets in 2011 and over the new year during the “fiscal cliff” negotiations averted shutdown on those occasions. But the bruising encounters have taken their toll and the two parties have never been so far apart as now.

This week, Obama accused a faction of House Republicans of holding the country to “ransom” over an “ideological crusade” with their opposition to Obamacare. Shutting down government because one party is unhappy with a law passed by a previous Congress and endorsed by the Supreme Court is a new and damaging tactic in a legislature that is as dysfunctional as it is unpopular.

Gerrymandered congressional districts have deepened the political divisions in Washington, creating homogenous constituencies where the only real challenges Democrats and Republicans face is from the more extreme elements within their own parties. This pushes members of Congress further to the left or the right and away from middle ground where they might agree on contentious policies.

The failure to reach a compromise poses real risks to governance structures and undermines America’s standing as an economic superpower and the US dollar as the world’s reserve currency.

"This is not the routine chest-bumping with little tweaks that used to happen with a debt increase," said Theda Skocpol, a professor of political science at Harvard University.

“Right now, we have a major party that has committed itself – and their leaders have openly said this – to use the denial of government funding or a debt increase as tools to enforce major policy changes on Democrats that they would not be able to maintain in the normal legislative or electoral process.”

If Obama were to make concessions to Republicans, it would be “very dangerous” for future US governments, said Skocpol, and for that reason she could not say that a debt default was not possible.

The closer the political stand-off goes to the debt limit deadline, the bigger the Republican “ransom” grows as the risks to the economy increase. The knock-on effects of Congressional paralysis would be devastating, halting already anaemic economic growth, sending a high rate of unemployment even higher and raising borrowing costs for the government as well as for its businesses and people.

"If they don't get it together and we hit the debt limit, odds are high that we will go back into recession – it would be a very serious error," said Mark Zandi, chief economist at ratings agency Moody's, who hopes that "the odds of them reaching the debt limit are low because they must know it would be catastrophic for the economy and for their own political futures".