As the US government shutdown enters its third week and debt-ceiling negotiations continue, Huw McKay, a United States Studies Centre scholar at the University of Sydney, provides a negative forecast for the world’s largest economy.
Given the US stands at the centre of the global economy, the potential effects of the shutdown could reach an international scale.
The US treasury expects cash reserves to fall to a point where government cannot credibly run by October 17.
Mr Mckay predicts the ramifications of US instability will produce a global ripple-effect.
“The public sectors influence on the American Economy in 2014 will be negative,” he said.
According to Mr McKay, “the world growth number needs to come in line with the US,” as a direct result of the shutdown.
Further, he states the emergent market forecast with China, India and Brazil must decrease, and that has implications for Australia.
Most deadlines are non-negotiable, however delays and demand for concessions have stalled progress to a solution.
Mr McKay said the debt ceiling should be absolutely formulaic and mechanical.
A number of foreign investors were also fearful of the US financial vulnerability and the losses they may face.
But investor options are limited.
“For now there is no alternative for these holders. They have trillions of dollars to invest, they need liquidity, and the US treasury market, for better or for worse, is the only market which meets the important criteria for foreign exchange,” Mr McKay said.
Looking into the future, he points to China, the single biggest holder outside of the US Federal Reserve, as an obvious candidate to supplant the US treasury centric system.