Small Business Impacted If Congress Defaults On The National Debt

In what seems to feel like Groundhog Day every time we have a divided legislature, the federal government will hit its borrowing limit today, and increasing it will require Congressional approval. The first two weeks of the 118th Congress have produced signs that lawmakers could put the U.S. economy and small businesses in danger with theatrics. We have already seen House Republicans challenging their own party in electing a Speaker of the House and advancing 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 drive concessions from their moderate Republican and Democrat counterparts. Trying to reach a compromise is good, but holding the US economy hostage is not.

On January 13, U.S. Department of 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 limit ceiling without structural changes to Social Security and Medicare, decades-old programs supporting millions of Americans.

The Treasury announced it will have to begin taking “extraordinary measures’ ‘ to keep from defaulting on obligations. This includes suspending investment in the Postal Service Retiree Health Benefits Fund and reinvestment of the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan. Despite those efforts, if the debt ceiling is not raised in the coming weeks, the U.S. could default on its debt for the first time in history.

“Addressing the debt limit is about meeting obligations the government has already made, ensuring vital payments to Social Security recipients are uninterrupted 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 increased in a bipartisan way three times when Donald Trump was President, twice when Republicans had 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 erase $15 trillion in household wealth. How would this collective economic loss happen? Here are five ways defaulting on the national debt would harm Main Streets across the country and lead to economic downturn.

1. Costlier Small Business Loans

Almost all credit rating agencies rate the U.S. federal government at AAA, the highest level. Defaulting on the debt would lead to an automatic downgrade of that rating, driving up interest rates for all Americans. Small business loans will become more expensive as private lenders are forced to increase their interest rates. Even Small Business Administration (SBA)-guaranteed loans, which are often at a lower cost and more accessible but still reflective of market conditions, will become more expensive.

2. Squeezed 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 for the United States if it follows in these countries’ footsteps. Credit markets will tighten up and U.S. banks will prioritize lending to businesses with whom they have pre-existing relationships, which are more likely to be larger ones than small ones. Small businesses, especially unbanked ones and those in underserved communities, would be at a severe disadvantage when they have the least financial cushion. Many aspiring entrepreneurs will also face tougher times in obtaining access to 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 loan rates, small business credit card and personal credit card interest rates will also rise, squeezing the amount of money they have to work with and potentially driving them into more debt.

4. Plunging Stock Markets

The Moody’s Report estimates that stock prices would likely plunge by one-third, sparking that $15 trillion loss in household wealth. This would be a one-two punch for small business owners who would see their own retirement savings dissipate, as well as lose business from consumers who are now dealing with their lost nest egg. In turn, larger public companies could lose value, thus making it harder to incorporate small businesses into their vendor supply chain.

5. Delayed Treasury Payments

If the U.S. defaults on its debt, the Treasury would immediately cease paying government bills, some estimate this could impact 40% of the government’s operations. This would have a devastating trickle down impact to every aspect of American life, including small businesses who contract with the federal government, Social Security benefits, and other important programs that provide financial support to millions of Americans.

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