US Government Shutdown & Liquidity Crisis: Ripples Through Global Markets

Key Takeaways

• Prolonged US government shutdown is causing a liquidity crisis in global financial markets.
• The Treasury General Account (TGA) is playing a key role in draining liquidity from the market.
• Rising interbank lending rates reflect the liquidity crunch.
• Commercial real estate and auto loans are particularly vulnerable.
• Divergent trader views on the market's future.

The US government shutdown has officially entered its record-breaking 36th day. Over the past two days, global financial markets have taken a nosedive. Nasdaq, Bitcoin, tech stocks, the Nikkei index, and even safe-haven assets like US Treasuries and gold have not been spared. Market panic is spreading, while politicians in Washington continue to squabble over the budget. Is there a connection between the US government shutdown and the global financial market downturn? The answer is emerging: This is not just an ordinary market correction, but a liquidity crisis triggered by the government shutdown.

The Culprit: The Treasury General Account (TGA) Black Hole

The Treasury General Account (TGA) can be understood as the US government's central checking account at the Federal Reserve. All federal revenue, whether from taxes or the issuance of government bonds, is deposited into this account. And all government spending, from paying civil servant salaries to defense spending, is disbursed from this account. Under normal circumstances, the TGA functions as a transfer station for funds, maintaining a dynamic balance. The Treasury collects money and then quickly spends it, with funds flowing into the private financial system, becoming bank reserves, and providing liquidity to the market. The government shutdown has disrupted this cycle.

The Treasury continues to collect money through taxes and bond issuance, and the balance of the TGA continues to grow. However, because Congress has not approved a budget, most government departments are closed, and the Treasury cannot spend as planned. The TGA has become a financial black hole that only takes in money and does not release it. Since the shutdown began on October 10, 2025, the balance of the TGA has ballooned from approximately $800 billion to over $1 trillion by October 30. In just 20 days, more than $200 billion has been withdrawn from the market and locked away in the vaults of the Federal Reserve.

Analysts point out that the government shutdown has withdrawn nearly $700 billion of liquidity from the market in a month. This effect is comparable to the Federal Reserve implementing multiple interest rate hikes or accelerating quantitative tightening. When the banking system's reserves are massively siphoned off by the TGA, banks' lending capacity and willingness to lend decline significantly, and the cost of funds in the market soars. Those most sensitive to liquidity are always the first to feel the chill. The cryptocurrency market plummeted on October 11, the day after the shutdown, with liquidations approaching $20 billion. Tech stocks also faltered this week, with the Nasdaq down 1.7% on Tuesday, and Meta and Microsoft shares falling after earnings announcements. The downturn in global financial markets is the most direct manifestation of this invisible tightening.

The System is "Running a Fever"

The TGA is the "cause" of the liquidity crisis, and the soaring overnight lending rate is the most direct symptom of the financial system "running a fever." The overnight lending market is where banks lend short-term funds to each other, serving as the capillaries of the entire financial system. Its interest rate is the most realistic indicator of how tight or loose the "money spigot" is between banks. When liquidity is plentiful, borrowing money between banks is easy, and interest rates are stable. But when liquidity is drained, banks start to feel short of funds and are willing to pay more to borrow money overnight.

Two key indicators clearly show how severe this fever is: The first indicator is the SOFR (Secured Overnight Financing Rate). On October 31, the SOFR soared to 4.22%, its biggest daily jump in a year. This not only exceeds the upper limit of the federal funds rate set by the Federal Reserve at 4.00%, but is also 32 basis points higher than the Federal Reserve's effective funds rate, reaching its highest point since the market crisis in March 2020. The actual borrowing cost in the interbank market has spiraled out of control, far exceeding the central bank's policy interest rate.

The second more startling indicator is the usage of the Federal Reserve's SRF (Standing Repo Facility). The SRF is an emergency liquidity tool provided by the Federal Reserve to banks. When banks cannot borrow money in the market, they can pledge high-grade bonds to the Federal Reserve in exchange for cash. On October 31, SRF usage soared to $50.35 billion, the highest since the pandemic crisis in March 2020. The banking system has fallen into a severe dollar shortage and has had to knock on the Federal Reserve's last resort window.

Risks Aggravated

The fever in the financial system is causing pressure to be transmitted to the weak links in the real economy, detonating long-dormant debt time bombs. The two most dangerous areas currently are commercial real estate and auto loans. According to data from research firm Trepp, the default rate on commercial mortgage-backed securities (CMBS) for US office buildings reached 11.8% in October 2025, which is not only a historical high, but also exceeds the peak of 10.3% during the 2008 financial crisis. In just three short years, this number has soared nearly 10-fold from 1.8%.

Bravern Office Commons in Bellevue, Washington, is a classic example. This office building, once fully leased by Microsoft, was valued at $605 million in 2020. Today, with Microsoft's departure, its valuation has plummeted 56% to $268 million and has entered default proceedings. This commercial real estate crisis, the worst since 2008, is spreading systemic risk throughout the financial system through regional banks, real estate investment trusts (REITs), and pension funds.

On the consumer side, the alarm bells have also been sounded for auto loans. New car prices have soared to an average of over $50,000, and subprime borrowers face loan interest rates as high as 18-20%, with a wave of defaults looming. As of September 2025, the default rate on subprime auto loans approached 10%, and the overall delinquency rate on auto loans has grown by over 50% in the past 15 years. Under the pressure of high interest rates and high inflation, the financial situation of lower-income American consumers is rapidly deteriorating.

From the invisible tightening of the TGA, to the systemic fever of overnight interest rates, to the debt implosions of commercial real estate and auto loans, a clear crisis transmission chain has emerged. The spark inadvertently ignited by the political gridlock in Washington is detonating structural weaknesses already present within the US economy.

How Do Traders View the Market?

Faced with this crisis, the market has become deeply divided. Traders stand at a crossroads, fiercely debating the direction of the future. Pessimists, represented by Mott Capital Management, believe that the market is facing a liquidity shock similar to that at the end of 2018. Bank reserves have fallen to dangerous levels, closely resembling the situation in 2018 when the Federal Reserve's balance sheet reduction caused market turmoil. As long as the government shutdown continues and the TGA continues to absorb liquidity, the market's pain will not end. The only hope lies in the quarterly refunding announcement (QRA) to be released by the Treasury on November 2. If the Treasury decides to lower the target balance of the TGA, it could release over $150 billion of liquidity into the market. But if the Treasury maintains or even raises the target, the market's winter will be even harsher.

Raoul Pal, a well-known macro analyst representing the optimistic side, presents a compelling pain window theory. He acknowledges that the market is currently in a liquidity squeeze pain window, but is convinced that a flood of liquidity will follow. In the next 12 months, the US government will need to roll over as much as $10 trillion of debt, forcing it to ensure market stability and liquidity. The government shutdown will end, and hundreds of billions of dollars of pent-up spending from the government will flood into the market like a deluge, the Federal Reserve's quantitative tightening will technically end, and may even reverse. In preparation for the 2026 midterm elections, the US government will spare no effort to stimulate the economy, including cutting interest rates, easing bank regulation, and passing cryptocurrency legislation. With China and Japan also continuing to expand liquidity, the world will usher in a new round of easing. The current pullback is just a wash in a bull market, and the real strategy should be to buy on the dip.

Major institutions such as Goldman Sachs and Citi take a relatively neutral view. They generally expect the government shutdown to end in one to two weeks. Once the impasse is broken, the massive amounts of cash locked in the TGA will be released quickly, easing liquidity pressures in the market. But the long-term direction still depends on the QRA announcement from the Treasury and the follow-up policies of the Federal Reserve.

History always seems to repeat itself. Whether it was the balance sheet reduction panic of 2018 or the repo crisis of September 2019, both ended with the Federal Reserve surrendering and re-injecting liquidity. This time, faced with the dual pressures of political gridlock and economic risk, policymakers seem to have arrived at a familiar crossroads again. In the short term, the fate of the market hangs on the whims of politicians in Washington. But in the long term, the global economy seems to have become trapped in a cycle of debt, liquidity, and bubbles and cannot break free. This crisis, inadvertently triggered by the government shutdown, may just be a prelude to another even larger round of liquidity frenzy.