1. Money
You can opt-out at any time. Please refer to our privacy policy for contact information.

How the Default on U.S. Debt Would Affect Small Business

Implications of Default on Debt Ceiling for Small Business and the Economy

By

In the years that the U.S. has been a country, it has never defaulted on its debt. What does that mean exactly? It means that, if the U.S. defaults on its debt, it will not pay the interest and any amount of the principal it owes by August 2, 2011. It also means that it will not raise the national national debt ceiling. The implications are similar to what happens if you default on your personal or small business debt. Your financial picture gets increasing dire. That will happen to the U.S. if we default on our debt. What are the implications for small business?

It will become very difficult or impossible for the U.S. to borrow any money. The U.S. now borrows 38% of all it spends. Forty percent of the U.S. spending is discretionary. Discretionary spending is that which is not mandated by law such as social security or Medicare. So, essentially, everything that isn't mandated by law will stop. It will not be purchased because we can't borrow the money to purchase it. Examples of discretionary spending are military spending except foreign military spending, air traffic control, housing and health care spending, education like student financial aid, environment, transportation, and more. Some of you may cheer because you think we should cut spending. However, is this the way to do it?

The answer to that is no way. If we default, our credit rating will be affected for a long time, even if Congress eventually decides to pay the bills. Federal workers and federal contractors will not be paid and many small businesses are federal contractors. This will reverberate across the U.S., not just in Washington, D.C. Ratings agencies like Moody's and Standard and Poor's will downgrade our debt and U.S. Treasury securities will become worthless.

When U.S. Treasury securities become worthless, the U.S. would be effectively bankrupt right along with other countries like China. China holds so much U.S. debt that it might bankrupt it as well. It's fair to say that the devaluation of U.S. Treasury securities could cause a global economic collapse.

If the U.S. dollar collapses, which would happen if the economy and U.S. Treasuries collapse, there would be massive and widespread inflation, even hyperinflation. Small businesses would not be able to stock their products. Even if they could, they would be so expensive that customers couldn't buy them. Imports would rise dramatically in price and that includes the price of gasoline and everything else we import.

If the U.S. can't pay its debt, then interest rates on its debt will go up. It works exactly like it would work if a small business can't make the interest payments on its mortgage or lease payments. The small business would experience an increase in interest payments. The same thing would happen to the U.S. government but it would have a greater effect. Bank interest rates, credit card interest rates, and just about every other interest rate would rise for not only the government but businesses and consumers. No one would be able to borrow money for anything.

The collapse of the U.S. Treasury securities and the dollar and the increase in the price of imports and the decrease in the price of exports are only a few of the problems we would face. The last day we can face the problem of the debt ceiling is August 2. On August 3, Social Security payments are scheduled to go out and on August 3, Treasury securities are due. If we default, chances are, neither will take place. Payments to our soldiers will stop. The stock market will fall to a level that will make the fall in 2008 a joke, though it is impossible to invest for such an eventuality. It is hard to comprehend the real results of these actions in the U.S. Social chaos will result.

A troubling aspect to this is that U.S. politicians, in both the executive and legislative branches of government, don't seem to realize that this is not the time for partisan political posturing or game-playing. This is the reason we elected them. It's time to get something done. This problem is a double-edged sword that must be solved from more than one angle. Yes, there must be spending cuts. Yes, there must be tax increases. If handled properly, those tax increases don't have to hurt small businesses. There are many types of tax increases that can be levied that have nothing at all to do with small business. On the other hand, there are many substantial spending cuts that have nothing to do with Social Security or Medicare. One of the reasons we elect politicians is as negotiators. This is the time to negotiate.

The interesting thing is that there is very little time left if we want to save face with the rest of the world. The world is watching and waiting. The U.S. dollar is the gold standard of currency in the world. If we get much closer to default, that will change and gold will actually become the gold standard. The bottom line is that we don't really know what will happen if the U.S. defaults on their debt. Why? It's never happened before. I don't think we want to find out.

©2014 About.com. All rights reserved.