While the Biden administration has an ambitious spending agenda – it launched a $US1.9 trillion pandemic relief program of its own, has a $US1 trillion infrastructure program before Congress and plans a $US3.5 trillion budget (albeit largely funded by tax increases) -- much of its spending has yet to occur.

Treasury’s initial response to hitting the debt ceiling has been to run down its cash reserves to avoid issuing new debt, selling some investments and ceasing to make contributions to some government employee retirement funds.

Given that the US bond market, and the short end of it in particular, provides the key benchmarks for global debt, the impact of the shutdown and how and when it might be resolved -- or not -- has global implications.

The decision to reduce its cash reserves from $US1.6 trillion earlier this year to about $US450 billion now has - along with the cessation of new issues of Treasury securities and a lengthening of the maturity profile of its borrowings - been cited as a factor in the massive infusions of liquidity into the US financial system that has created a shortage of Treasury bills and driven short-term US Treasury yields down to near-zero this year, despite historically high inflation numbers.

That cash and liquidity has been flowing, via the government, into the US economy and banking system and, because of the surplus of liquidity in the system, has been parked overnight at the US Federal Reserve at record levels.

It might also have had an influence on the US stockmarket, given that the continuing slide in yields has further reduced the alternatives for even barely-positive returns.

Treasury Secretary Janet Yellen has suspended new debt issuance from Monday until at least the end of September. The Congressional Budget Office has estimated that, even with the extraordinary measures to conserve cash, the government is likely to run out of cash in October or, at the latest, November.

If that were to happen, the US would be unable to pay the interest on its debts – now running at about $US300 billion a year -- and would be in technical default.

That’s improbable, even though there are some Republicans who profess to be unfussed by that prospect and Trump himself, citing his own personal experience with debt, once suggested that as president he would keep borrowing, knowing that if the economy crashed “you could make a deal” with creditors to buy back US bonds at a discount.

A resolution that raises the debt ceiling is likely, via either political manoeuvrings by the Democrats, who might be able to use the budget “reconciliation” process to pass it with a simple majority, or through Democrat concessions on social spending. But it is likely that the aggressively partisan and uncooperative stance the Republicans have adopted in response to the Democrats’ election victory will drag the process out to the eleventh hour.

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That wouldn’t be good for financial markets. Past shutdowns have hurt the economy and financial markets, and the closer Congress gets to the “X-date” -- the moment there would be a default – the more volatile markets are likely to be.

Given that the US bond market, and the short end of it in particular, provides the key benchmarks for global debt, the impact of the shutdown and how and when it might be resolved -- or not -- has global implications.

In previous shutdowns there has been, paradoxically, floods of money into short-term government debt in a rather peculiar version of a “flight to safety.“

Another phenomenon of past shutdowns has been an avoidance by investors of Treasury securities expiring during the shutdown period, which caused some aberrative trading within the bond market.

If investors took the risk of default seriously, of course, yields could be expected to spike – and the US sharemarket to fall – as people cashed out of the market to avoid losses. The ripples from that would be significant and would flow through international markets and financial systems.

The “domestic” US politicians are now engaged in is occurring at a vulnerable moment for the US and global economies, given the new threats to the world’s largest economy posed by the spread of the Delta version of the coronavirus. Signs are the developed world is already past the peak in the recovery from the economic effects of the pandemic.

Yellen has said that a failure to increase the debt limit would have “absolutely catastrophic economic consequences” and could ignite a financial crisis.

Hopefully sanity will prevail - but in the Trump era of US politics and with a Republican party whose make-up is very different to its predecessors, nothing can be taken for granted.