Much is still in flux, but in the event of a default a worst-case scenario has the nation teetering on a double-dip recession that could impact every corner of the area’s economy. On a macro level, a default would jeopardize the government’s ability to find immediate buyers of its debt to finance spending. With interest rates on debt soaring due to the credit downgrade, as Moody’s has indicated could happen, the impact on the deficit would be enormous, pushing it beyond $2 trillion.
This immediately would spark a shutdown of many government projects, forcing Congress to cut spending. And that certainly would not help the contracting sector, which relies on government procurement.
The United States is no longer a country tied to a gold standard, or any standard for that fact, that backs our currency. Therefore, the currency that we use on a daily basis to buy food, gas or the latest gadget is based upon the “full faith and credit” of the United States. Just like when you miss a payment on a credit card and the interest rate on that card increases and it impacts your credit score, the U.S. would have to pay a much higher interest rate when borrowing money from places like China. Higher borrowing costs for the United States would mean higher interest rates on your credit cards, car and business loans and mortgages.
This would have a serious impact on consumer spending, driving down business revenue.
Automobile dealers, which are experiencing a steady improvement in sales after relying during the recession on government gimmicks like “Cash for Clunkers” and other incentives to move inventory, would watch auto sales plunge again with borrowing costs on auto loans soaring beyond the reach of customers.
Stock markets would sell off around the world, lowering the value of the dollar with investors moving towards a stronger, more stable currency. This would cause prices of imported goods and commodities to skyrocket, which would result in higher prices for us even though we are already squeezed financially to the limit.
Currently, on average, 23 percent of wages are consumed by food and energy. Expect that to increase to almost 50 percent, which would mean less money in your pocket.
Businesses, which are already struggling to survive, would see an immediate drop in consumption which makes them even more defensive. And with the cost of borrowing money for production, expansion or hiring new workers rising, businesses would be forced to slash expenses — by halting hiring and even cutting their payrolls.
As for housing, since people buy a “payment” when purchasing a home, the median house price would slide by up to 30 percent due to the sharp rise in interest rates caused by a default. And as real estate staggers, home building construction would come to a complete standstill with the demand for new homes plunging.
While this scenario is possible, I’m hopeful that cooler minds will prevail and an agreement is reached. If not, D.C.-area business people should prepare for the worst.
Lance Roberts is chief executive of Streettalk Advisors, a money management firm in Houston.