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When the United States Government Shutdown: The Unseen Impact on Crypto and the Economy

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In the land of the free and the home of the brave, where dreams are both imagined and realised, there’s a recurring nightmare that has become all too familiar—the looming spectre of a government shutdown. This chilling threat casts a shadow of uncertainty over the United States, one of the world’s financial epicentres. But what exactly happens when the gears of the American government grind to a halt, and how does it affect the dynamic world of cryptocurrency? Let’s embark on a journey through the intricate web of causes, effects, and intriguing undercurrents about how government shutdowns affect the crypto market.

The Dramatic Countdown: A Temporary Reprieve

For the time being, the United States remains safe from the edge of the abyss. The millions of government workers who were dreading furlough amidst the shutdown threat can breathe easy, at least for now.

The federal government has deftly managed to dodge the shutdown bullet by issuing a last-minute bill, securing a temporary reprieve. The bill, approved at the eleventh hour, served as a lifeline, preventing the government from plunging into chaos. But this respite is just a stop-gap bill extending the government’s funding for another 45 days, just enough to keep the Government open until November 17, 2023. On that day, the current bill will expire. The news of this temporary agreement on government funding came as a pleasant surprise to many, creating a temporary bubble of relief.

The Origins of Government Shutdowns

Just a (not so) fun fact, the US is the only country in the world which can actually shut down. While other countries can operate without a new budget, relying on the previous year’s financial plan, the U.S. follows a different path. This peculiarity traces back to 150 years ago when several U.S. agencies notoriously exhausted their annual budgets within a few months and returned to Congress for more funds. To address this, Congress passed the Anti-Deficiency Act, making agencies unable to spend beyond the appropriations allocated by Congress for that fiscal year. In other words, if Congress doesn’t pass a new funding bill every year, agencies cannot spend a dime and shut down.

If Congress fails to pass an annual funding bill by the end of the fiscal year, it triggers a government shutdown. Deciding where to use a country’s funds is one of the main responsibilities, yet it’s often overloaded with politicking. This makes deciding and confirming the bills difficult. Passing these critical bills has become increasingly challenging as Congress passes fewer laws each session.

Ideally, Congress should approve a budget resolution by mid-April and pass spending bills by October 1st. But in reality, this hasn’t happened for over two decades. To keep the government running, temporary funding bills are used, typically in December. The growing divide between Republicans and Democrats worsens the situation, making funding the government a recurring and difficult battle as they bicker about how to allocate the nation’s funds.

How are Shutdowns Likely to Happen

In the years following the Anti-Deficiency Act, the United States has witnessed several government shutdowns, and the threat is likely to continue to loom over the nation.

As the American Political scene gets increasingly polarised and differentiated, bills and appropriations will continue to be delayed as Congress and the President continue to bicker among themselves about the country’s funding. Experts say it is highly likely that the problem will continue to persist unless something is done to change it at the root.

Notably, late 1995 – 1996 marked the first major shutdown, lasting three weeks. However, the most prolonged shutdown in history occurred in late 2018 – 2019, spanning an excruciating 35 days. While some federal employees endured 35 days without pay in 2019, more than half of them were deemed essential and were required to work without compensation.

At this point, every end of September has grown to become a dreaded time for many who depend on the US government for their livelihood.

The Ripple Effect on the Economy

A government shutdown’s repercussions echo across the broader economy and the consequences are severe. From delayed critical economic data to a decline in the Gross Domestic Product (GDP). With every passing week of a shutdown, the GDP falls by 1-3%. This economic turmoil doesn’t just remain within the corridors of power; it affects the regular people who bear the brunt of this turmoil. As the economy dips, public investment appetite wanes, resulting in fewer resources flowing into crypto and other investments.

Furthermore, when the government shuts down, there are inevitable delays in economic data releases and reports that financial markets rely on to make informed decisions. The stock market can become volatile, and investment decisions are often made with caution, leading to decreased market activity.

The shutdown’s financial ripple reaches beyond just the direct economic impacts. Federal employees who experience pay freezes, as well as contractors who work with government agencies, bear the brunt of the situation. Unlike employees, contractors don’t receive back pay, leaving them financially vulnerable.

Only sectors deemed essential are allowed to work. The shutdown’s impact extends to vital areas, including regulatory activities. For instance, the SEC could suspend a significant portion of its workforce, affecting financial activities and causing regulatory slowdown. This has a trickle-down effect, affecting market sentiment and creating an atmosphere of uncertainty.

Beyond federal employees, contractors, and a myriad of linked businesses, including food and beverage providers and service companies will feel the strain. Reduced spending power and risk aversion are to become the unfortunate norm during these challenging times.

It also affects businesses and workers who aren’t connected directly to the government. As the population’s spending power decreases, so does their risk appetite. This, in turn, affects the overall market dynamics, including the world of cryptocurrency.

The Ripple Effect on Crypto

Cryptocurrency remains largely unbothered by government shutdowns, at least not directly, since they operate independently from traditional financial systems and government control.

Though cryptocurrencies are largely decentralised from governments, government shutdowns can still trigger a chain reaction that’ll affect the market:

Price Fluctuations: Crypto prices can be inversely related to government shutdowns, with price fluctuations often occurring during these periods of economic uncertainty. For instance, during the January shutdown, Bitcoin prices exhibited losses.

SEC Court Cases: The fate of cryptocurrency may remain uncertain when the SEC is operating at reduced capacity. This can affect investor demand for crypto assets as cases against exchange platforms like Binance, Coindesk and cryptocurrency issuers are delayed.

Delay in ETF Applications: Regulatory bodies like the SEC play a pivotal role in approving cryptocurrency-related financial instruments, including exchange-traded funds (ETFs). Delays in these approvals can impact the crypto market.

People’s Risk Appetite: Government shutdowns can lead to increased economic uncertainty, making investors more risk averse. Cryptocurrencies, known for their volatility, may experience shifts in investor sentiment.

Stablecoins: Stablecoins pegged to the US dollar, such as USDC and USDT, are not immune to government shutdowns. A USD downturn can affect stablecoin valuations and, by extension, crypto traders who rely on these assets.

The Long-Term Ramifications of Shutdowns

In the near future, government shutdowns do not really have much effect on the economic markets. In fact, they often bounce back higher within 30 days following a shutdown.

For the long term though, the consequences extend beyond these initial tremors. Government shutdowns can affect the United States’s credit rating and its interest rates, which could impact the broader economy. As the world’s economic powerhouse, the United States plays a pivotal role in global financial stability. Changes in its economic landscape can send ripples across the international financial sphere, influencing market sentiment and investment decisions, including those related to cryptocurrencies.

Government shutdowns don’t just affect Americans. It ripples and disrupts the economy and even influences the crypto market. Understanding this tango between government shutdowns, the economy, and cryptocurrency is crucial to help you anticipate and navigate your crypto journey.

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