Be afraid. Be very afraid.
That seems to be the overall message from economists on the consequences a U.S. government debt default would have on small businesses and the economy as a whole. Though a default could be avoided by raising the U.S. debt ceiling, it’s still not clear if Congress will reach a compromise in time. Many economists predict that the U.S. would default around October 17.
Even an accidental default in 1979—in which a back-office Treasury Department glitch left $122 million-worth of T-Bills unredeemed—added $12 billion to the national debt, according to the Associated Press, citing a 1989 study. That event would be a wave in the pond compared to the economic tidal wave that a legitimate default would cause today:
1. A major recession. Economists generally predict such a default would cause financial market panic that would be just as bad, if not worse, as the panic sparked by Lehman Brothers' collapse in 2008. That is because so many financial investments and vehicles use T-Bills as a bedrock, since the United States has never defaulted on its debt on purpose. Goldman Sachs has predicted a 4.2 percent drop in GDP over the year, according to Business Insider.
2. Falling revenues. In all likelihood, businesses would halt hiring or even initiate layoffs after a default, and people would hold off on spending money in general. It would be late 2008 all over again, with a harsh effect on the bottom line.
3. Inflation. Unlike in the last recession, prices of consumer goods could rise quickly this time around. That's because the loss of the United States' rock-solid creditworthiness would likely hammer the value of the dollar and raise the cost of everything from gasoline to food, according to a CNBC report citing notable economists. Consumers' savings would not go as far.
4. Fewer small-business loans. The government shutdown has already halted the processing of SBA loan applications. But that inconvenience pales in comparison to the tightening in borrowing standards that would likely take place in the event of a financial panic caused by a U.S. default. Not only would banks be less willing to lend to business owners, but interest rates would rise—driven up by the higher interest rates for U.S. government debt post-default.
5. Higher taxes. There would likely be more political pressure on Congress to raise taxes on corporations and individuals, because the higher T-bill rates would make it even more expensive for the government to borrow money. The high price of a default would also mean the government would be looking for ways to shore up its balance sheet.
Some Republican leaders, as well as Moody's, suggest the U.S. Treasury Department could avoid a default on its own by prioritizing the government's bills and not making certain payments to Social Security recipients and others, according to The Washington Post. But such missed payments would cause economic havoc and potentially push the country into a recession anyway.
Read more articles on the government shutdown.
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