The Debt Ceiling Crisis Should Scare You Because of This
NEW YORK ( MainStreet) Three days until the debt ceiling and counting.
Anyone who's been paying attention to the news lately can be forgiven for thinking the debt debate might not have much to do with them. After all, despite near-apocalyptic coverage, the conversation so far has been all about credit markets, interest fluctuation and investor confidence. It's perfectly reasonable of most Americans to view this as just another Washington kerfuffle and respond accordingly: yawn then get back to work.
If only it were so.
Unfortunately, like the ongoing shutdown fight, a crisis over the debt ceiling is something that everyone would eventually feel. Largely this is because of the much-misunderstood nature of Treasury borrowing, which creates creditors but no new debt. The agency raises money to pay previously authorized bills, such as for military contracts, salaries or doctors' bills under Medicare. Since the agency borrows only to pay existing obligations, the amount the government owes never changes.
The debt ceiling is about transferring debt, not creating it.
Because of this, the debt ceiling doesn't change how much America spends but whether the government pays its bills. Default would cause a ripple effect across the entire economy, starting with credit markets that depend on the timely payments of Treasury bonds. Economists argue about what the precise fallout would be, since an intentional government default has never happened before in the United States.
At best, the result would shake an already tenuous economic recovery. At worst, interest rates would climb, credit would freeze, lending would grow scarce and we could be looking at another 2008.
For those of us at the ground level, the first casualty would be employment.
"If the credit market freezes up all of a sudden, businesses are not going to have access to money," explained Thomas Hungerford, an economist with the Economic Policy Institute. "So small businesses and startups are not going to be able to get credit to expand or to hire."
"A lot of large businesses, they fund their investments more through debt than equity," Hungerford added. "If people don't have access to loans, they stop buying durable goods. That kind of dries up. Well, who makes durable goods? Our manufacturing sector. If they're not selling, they lay off workers."
Without access to credit, new businesses won't have the money to hire or keep employees through lean times. Existing ones will lose the resources to expand, or may decide to hoard cash in a defensive huddle and shed salaries to do so, as many did during the last recession.
What's more, companies without credit lose purchasing power. As sellers lose business, they could lay off even more workers, who in turn then lose purchasing power at the individual level. Together it creates the vicious cycle of an economic recession, all starting at the top. An electrician with absolutely no stake in the market can still lose his job, because a business failed to open when it couldn't get a loan. When it comes to the economy, were all in this together.