Small businesses affected if Congress defaults on the national debt

by Ana Lopez

In what seems like Groundhog Day, any time we have a divided legislature, the federal government will reach its borrowing limit today, and any increase would require Congressional approval. The first two weeks of the 118th Congress have seen signs that lawmakers may be putting the US economy and small businesses at risk with theater. We’ve already seen House Republicans challenge their own party by electing a Speaker of the House and introducing bills that have little chance of passing the Senate. The more extreme conservative wing of the House Republicans are now trying to use the serious issue of raising the debt limit to gain concessions from their moderate Republican and Democratic counterparts. Trying to compromise is good, but not holding the US economy hostage.

On January 13, US Treasury Secretary Janet Yellen sent a letter telling Congress that 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 limit ceiling without structural changes to Social Security and Medicare, decades-old programs that support millions of Americans.

The Treasury announced that it will have to start taking “extraordinary measures” to prevent obligations from being met. This includes suspending investments in the Postal Service Retiree Health Benefits Fund and reinvesting the Government Securities Investment Fund from the Federal Employees Retirement System Thrift Savings Plan. Despite those efforts, if the debt ceiling is not raised in the coming weeks, the US could default for the first time in history.

“Addressing the debt limit is about meeting commitments the government has already made, ensuring essential payments to Social Security recipients and continuing to support our veterans,” said Senate Majority Leader Chuck Schumer. [D-NY] and House Democratic Leader Hakeem Jeffries [D-NY]. “The debt limit was raised three times in a bipartisan way when Donald Trump was president, twice when Republicans had a majority in the House and Senate. This time it should be no different.”

A analysis by Moody’s Analytics, chief economist Mark Zandi estimates that a default 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 happen? Here are five ways that a default on the national debt would hurt major streets across the country and lead to an economic downturn.

1. More expensive small business loans

Almost all credit rating agencies rate the US federal government at AAA, the highest level. A default 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 cheaper and more accessible but still reflect market conditions, will become more expensive.

2. Credit markets under pressure

Argentina and Greece have horror stories about what happens to a country’s credit markets when it defaults on its debts. The same will be the case for the United States if it follows in the footsteps of these countries. Credit markets will tighten and US banks will prioritize lending to companies with whom they already have existing relationships, which are larger rather than small. Small businesses, especially unbanked ones and those in underserved communities, would be at a serious disadvantage if they had the slightest financial buffer. Many aspiring entrepreneurs will also have a harder time accessing capital.

3. Higher credit card interest rates

Small business owners often use business or personal credit cards to cover business expenses and manage debt. As with borrowing rates, interest rates for small business credit cards and personal credit cards will also rise, putting pressure on the amount of money they have to work with and potentially pushing them into more debt.

4. Falling stock markets

The Moody’s report estimates that stock prices are likely to fall by a third, leading to a loss of $15 trillion in household wealth. This would be a one-two punch for small business owners who would see their own retirement savings disappear, as well as lose customers to consumers who are now dealing with their lost nest egg. Larger publicly traded companies could, in turn, lose value, making it more difficult to include small companies in their suppliers’ supply chains.

5. Delayed Treasury Payments

If the US defaults on its debts, the Treasury would immediately stop paying government bills, some estimate could affect 40% of government operations. This 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 major programs that provide financial assistance to millions of Americans.

The debt limit is not a time to play politics as usual. Congress must raise the debt ceiling to protect small businesses, entrepreneurs and our economy.

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