I believe by now every small business owner knows that the two political parties have been negotiating to raise the debt ceiling so that the US can continue to honor its debts. Why have they not yet come to a deal? I think you have all heard the arguments from both sides, but whatever the arguments, it is July 31st and they have not reached an agreement. While it is said that Washington likes to be dramatic, and will ultimately make a deal at the last minute, it feels like the last minute already. In my mind it is becoming more and more probable that they will not reach a deal. If they do not reach a deal to raise the debt ceiling how will your small business be affected?
If there is no deal and Congress does not raise the debt ceiling, there will not be enough money to make all the usual government payments. The government makes many payments including, interest on treasury bills, repaying matured treasury bills, social security payments to retirees, wages to government employees including soldiers, payments to Medicare and Medicaid providers, payments to contractors who provide military supplies and who operate prisons, and many more.
If your small business provides goods or services to retirees, soldiers, government workers, medical practitioners who serve Medicare and Medicaid patients, government contractors, and others who receive some form of payment from the government, you might expect to see a reduction in your income in the event that the debt ceiling is not raised. As a result you may have to reduce payments to your suppliers, and workers; and generally spend less since you have less coming in. There would be a ripple effect resulting in a further contraction in the economy followed by an increase in unemployment followed by more contraction…..
Loans would also become more expensive. It is similar to your having a credit card debt that needs to be serviced. There is a minimum payment including interest that needs to be made every month. You come to a point where your income is not enough to pay all your expenses plus the credit card payments. You have a chance to get another credit card so that you can pay your expenses as well as service the credit card. You hesitate about getting another credit card because it is just increasing debt, and creating another monthly bill, but if you do not get the new card, you become delinquent on the present credit card, and your interest rate moves from 10% to 23%. Your ability to get a new loan in the near future is also much more difficult, because the credit score is now in the toilet.
If the US defaults interest rates will rise for the government as well as everyone else. If your small business has an adjustable rate loan, your interest rate will rise resulting in increased minimum payments, and generally worsen your cash flow situation.
Will the US default on its national debt?
The US is not going to default on its national debt even if the political parties can’t come to a deal. The president would invoke section 4 of the 14th amendment. So far the White House has insisted that they have no plans to invoke the 14th amendment and their legal advisors seem to disagree that it could be used. It would be politically incorrect to say in advance that that the president plans to use the 14th amendment. I believe the president would rather the congress send him a bill he can sign. It would give him more political cover. Invoking the 14th amendment is like stepping out on high ledge all by yourself. If, however, Congress does not send the president a bill he can sign, he will have no choice but to invoke the 14th amendment. Technically he does have a choice, but it is a Hobson’s choice. Invoke the 14th amendment or watch helplessly as the economy goes into a tail spin.
What does he have to lose by invoking the 14th amendment?
Some interest groups may go to court to establish that he does not have the authority to use the 14th amendment. His political opponents may even try to impeach him. It would be said that he is not a leader because he could not bring the parties together to get a deal done.
What does he have to lose by doing nothing?
The US would certainly lose its AAA credit rating. The economy would go into free fall on his watch, and unemployment would increase even more. He and the democrats would surely be thrown out of office in 2012.
I believe if the congress does not send the president a bill he will invoke the 14th amendment and face the consequences as they appear less onerous than doing nothing.