The probability of a US government shutdown this week has exploded to nearly 96%.
Last week, it was only around 18%.
And this is a serious liquidity risk for markets.
Democrats are saying that they will not let the spending bill pass until these demands are met.
• Mandatory body cameras for all immigration officers.
• Banning the use of masks by agents during operations.
• Ending "roving patrols" and tightening warrant requirements for entering homes.
Republicans have resisted these changes, arguing for strong immigration enforcement and defending the actions of federal agents
And here is the dangerous part:
The debt ceiling has already been raised to $41.1 trillion.
That means politicians can afford to fight longer without instantly breaking government operations, which actually increases the chance of a prolonged shutdown.
Along with this, every key aspect of the US economy is breaking down.
Jobs market, retail spending, and corporate bankruptcies are all getting worse.
But why would markets suffer?
When a shutdown starts, the US Treasury usually rebuilds its TGA. To do that, it pulls money out of financial markets.
During October shutdown, the TGA increased by about $220 billion. That was a $220B liquidity drain from markets, and this led to a liquidity crisis.
If a shutdown happens again and continues for longer, the liquidity drain impact will be much bigger and could be brutal for the markets.