Debt ceiling effects on business owners
As the deadline to raise the debt ceiling approaches, Washington is still dragging its feet. It’s been more than a month since President Biden’s and Speaker Kevin McCarthy’s last meeting and there’s no sign of progress.
What happens if the U.S. defaults on its debts? Federal benefits could be cut, markets could tank, jobs could be lost, and America’s reputation would sour. Virtually everyone would be worse off from this self-imposed disaster.
Each American would feel the effects of a default in different ways. Here’s what a default on the debt would mean for small business owners.
Recession / Less Consumer Spending
Treasury Secretary Janet Yellen, the White House Council of Economic Advisers (CEA), the chief economists of Goldman Sachs, Moody’s Analytics, LPL Financial, and many others have warned that defaulting on the debt would spark a recession.
There are plenty of reasons why.
Goldman Sachs analysts said that stopping Social Security benefits, federal employee salaries, and Treasury bond payments “would be immediately killing the equivalent of one-tenth of American economic activity.”
The CEA warned that credit card interest rates would rise, making shopping more expensive. Consumer confidence could plummet, causing households to save more and spend less.
The economy could lose steam, quickly.
Moody’s Analytics concluded that the consequences of even a brief default “would be comparable to that suffered during the global financial crisis” of 2008. That recession killed 730,000 businesses in the U.S.
Limited Access to Capital
Treasury bills, notes, and bonds are considered virtually risk-free assets because the U.S. has always repaid their principal in-full and on-time. As a result, many types of lending – such as mortgages or car loans – peg their interest rates to the rates charged for Treasuries. If the U.S. defaults, Treasuries could lose their risk-free reputation, with investors demanding higher rates to compensate them for increased risk – making all forms of borrowing more expensive.
Businesses would be hit especially hard by higher borrowing costs-- 45% of small businesses took out a loan in 2021; still more might have been using personal credit cards to cover expenses. A default would make this borrowing more expensive and harder to find. Even loans guaranteed by the Small Business Administration would see higher costs.
More than 71,000 small businesses were contracted by the federal government in 2021, receiving a total of $154.2 billion. In addition to providing valuable services to the American people, these businesses sustain jobs and help buoy the economy.
As the U.S. approaches default, contractors may be the first ones on the chopping block.
The Bottom Line
There are plenty of “debates” that seem important to people in Washington but don’t matter much to regular people. The debt ceiling debate isn’t one of them. If the U.S., for the first time in our history, defaults on our debt obligations, every American will pay the price.