Shutdown averted

After much political rancour and the threat that the US shutdown would be followed by a Government default because of a failure to raise the debt ceiling, the US Congress has agreed on a deal that ends the government shutdown, funds spending to 15 January 2014 and suspends the debt ceiling until 7 February 2014. A Committee will be established to work on a medium-term budget plan.

 

Financial markets have welcomed the deal, as it avoids the worse-case scenario of a possible default on US government debt and has seen the government reopen. However, the short-term nature of the deal holds out the risk of yet another round of acrimonious negotiations in early 2014 and another opportunity for market disappointment and volatility.

 

Given the nature of the debate over the past few weeks and indeed as was the case in August 2011, it is hard to imagine why the US political system will deliver a smoother and more cooperative negotiation process early in 2014. Indeed, given the short-term nature of the budget and debt ceiling deals, we could see this argument resurface at least two more times before the November 2014 Mid-Term elections.

 

The economic uncertainty created by this debate over the budget and the debt ceiling could be a factor that sees the US Fed further delay its tapering of QE3 into Q1 2014.

 

Who are The Tea Party & what are they on about?

It is difficult for us in Australia to really grasp who the Tea Party are and what they are on about, particularly as there is no direct equivalent in Australian politics. They are playing a significant role in American politics so we need to pay some attention.

Wikipedia explains that the Tea Party movement is an American decentralized political movement (mostly comprised of Republican party supporters) that is primarily known for advocating a reduction in the U.S. national debt and federal budget deficit by reducing U.S. government spending and taxes. The movement has been called partly conservative, partly libertarian, and partly populist The name is derived from the Boston Tea Party of 1773, an iconic event in American history. Anti-tax protesters in the United States have often referred to the original Boston Tea Party for inspiration.

Peter Montgomery in the Huffington Post writes that “It has been a challenge for many Americans — and many people watching from overseas — to understand the Tea Party’s willingness to cause the country so much harm in its zeal to repeal a law designed to extend access to health care and comprehensive health insurance to all Americans”.

“What makes the Tea Party unique in the march of modern American conservatism is that the passions of the populist right, the uncompromising, expressive side of American conservatism, were brought to bear in the name of the doctrines of the fiscal absolutists. Suddenly, the zeal and the vitriol usually reserved for opposing abortion or the ‘gay agenda’ were being directed against Keynesian stimulus legislation, cap and trade climate legislation, economic regulation, taxation, and, above all, expansion of health insurance coverage to tens of millions of uninsured Americans”.

“The Tea Party’s willingness to threaten national financial ruin in the form of a government shutdown and a potential debt default if Obamacare, now being implemented as the law of the land, is not stopped.”

http://www.huffingtonpost.com/peter-montgomery/explaining-the-tea-party_b_4117140.html?utm_hp_ref=email_share

My takeaway on this is that the Tea Party includes many who hold their views with a near religious fervour and are disinclined to compromise. So don’t be surprised if we see similar political turmoil in coming months. Hopefully the more mainstream Republicans will not allow a repeat of recent disruptive events but that’s no certainty.

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