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Why a US government shutdown is likely

Yesterday, I wrote why a US fiscal standoff should mean recession in Q2. As an adjunct to that, I wanted to add a few words about the political process on how we get the standoff to a government shutdown and recession. As always, these are not advocacy pieces, just predictions of what is to come. I don’t think a standoff or shutdown is productive but the politics favour this.

The stage is set with President Obama playing to his base, telling us that the Republicans would be “irresponsible” and “absurd” for allowing the debt ceiling to lead to shutdown or default. His line is “America cannot afford another debate with this Congress about whether or not they should pay the bills they’ve already racked up.” Notice, he does not dispute the deficit hawk line that America’s deficit is bad and that it needs to be cut. Rather, he intimates that he would prefer to make those cuts via an amicable negotiation. And I expect he would prefer different cuts to the Republicans and would like any cuts to be less onerous than the Republicans.

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Here’s the thing; given how Congressional districts are divided in the United States via redistricting, members of Congress are more and more ideologically ‘pure’ as the districts have been drawn to favour one party politics intra-district. And from the perspective of the House of Representatives, this means that the base of the Republican members of Congress is ideologically opposed to tax and spending increases.

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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.