In what seems like Groundhog Day every time we have a divided legislature, the federal government will reach its borrowing limit today, and the increase will require congressional approval. The first two weeks of the 118th Congress have produced signs that lawmakers may put the American economy and small businesses at risk through theatrics. We’ve already seen House Republicans challenge their own party in electing the Speaker of the House and pushing bills that have little chance of passing the Senate. The more extreme conservative wing of House Republicans is now trying to use the serious issue of raising the debt limit to push for concessions from their more moderate Republican and Democratic colleagues. Trying to reach a compromise is good, but holding the American economy hostage is not.
On January 13, US Treasury Secretary Janet Yellen sent a letter to Congress saying the federal government will run out of money on January 19 if the debt ceiling is not raised. Republicans have said they will not raise the debt ceiling without structural changes to Social Security and Medicare, decades-old programs that support millions of Americans.
The Ministry of Finance announced that it would have to start taking “extraordinary measures” to prevent defaults. These include suspending investments in the Postal Service Retiree Health Benefit Fund and reinvesting the Thrift Savings Plan’s State Securities Investment Fund in the Federal Employees Retirement System. Despite these efforts, if the debt ceiling is not raised in the coming weeks, the US could default on its debt for the first time in history.
“Addressing the debt limit is about fulfilling the commitments the government has already made, ensuring uninterrupted vital payments to Social Security recipients and continuing to support our veterans,” Senate Majority Leader Chuck Schumer said. [D-NY] and House Democratic Leader Hakeem Jeffries [D-NY]. “The debt limit was raised in a bipartisan manner three times when Donald Trump was president, twice when Republicans held majorities in the House and Senate. This time should be no different.”
An analysis by Moody’s Analytics chief economist Mark Zandi estimates that defaulting on the national debt would wipe out as many as 6 million jobs and wipe out $15 trillion in household wealth. How would this collective economic loss occur? Here are five ways defaulting on the national debt would hurt high streets across the country and lead to an economic crisis.
1. More expensive loans for small businesses
Almost all credit rating agencies rate the US federal government at AAA, the highest level. Defaulting on the debt would lead to an automatic downgrade of that rating, raising interest rates for all Americans. Small business loans will become more expensive as private lenders are forced to raise their interest rates. Even Small Business Administration (SBA) guaranteed loans, which are often lower and more affordable but still reflect market conditions, will become more expensive.
2. Tight credit markets
Argentina and Greece have horror stories about what happens to a country’s credit markets when it defaults on its debt. The same will be the case with the United States if they follow in the footsteps of these countries. Credit markets will tighten and US banks will prioritize lending to companies with which they have pre-existing relationships, which are more likely to be large than small. Small businesses, especially the unbanked and those in underserved communities, would be at a serious disadvantage if they had even the slightest financial cushion. Many aspiring entrepreneurs will also face a tougher time getting access to capital.
3. Higher interest on credit cards
Small business owners often use business or personal credit cards to cover business expenses and manage debt. As with interest rates on loans, interest rates on small business credit cards and personal credit cards will also rise, reducing the amount of money they have to work with and potentially pushing them into even more debt.
4. Fall of the stock market
The Moody’s report estimates that stock prices would likely fall by one-third, causing a loss of $15 trillion in household wealth. It would be a one-two punch for small business owners who would see their own retirement savings go down the drain, as well as losing business from consumers who now face their lost nest egg. On the other hand, larger public companies could lose value, making it difficult to include small businesses in their supplier supply chain.
5. Deferred treasury payments
If the US defaults on its debt, the Treasury Department would immediately stop paying government bills, and some estimate that 40% of government operations could be affected. It would have a devastating impact on every aspect of American life, including small businesses that contract with the federal government, Social Security benefits and other important programs that provide financial support to millions of Americans.
The debt limit is no time to play politics as usual. Congress needs to raise the debt ceiling to protect small businesses, entrepreneurs and our economy.