U.S. default could deliver swift hit to consumers
By Cezary Podkul,
Life might get more difficult for many Americans if Congress doesn’t reach a deal to raise the government’s borrowing limit.
Without the ability to borrow more, the Treasury has said it would not have enough cash on hand to pay all its bills, which include payments due on the government’s outstanding debt. Experts disagree on when exactly such a default would occur or how long it would last. But the impact could be wide-reaching.
“In almost every area where people have pocketbook concerns — jobs, interest rates, credit, availability of government payments, benefits — all those things would be affected in relatively short order,” Ben S. Bernanke, chairman of the Federal Reserve, warned Congress earlier this month.
●Monthly budgets might take a hit. To avoid a default, the Treasury would have to conserve cash and prioritize its payments, endangering the estimated 80 million checks the government pays each month, including 56 million to Social Security beneficiaries and 8.3 million to disabled citizens. That means the elderly and the disabled could feel the pinch, as could anyone else counting on the government for unemployment assistance, food stamps or other benefits.
●Federal employees and contractors might not get paid. The federal government also processes an estimated 3.9 million payments each month for federal workers’ salaries as well as 1.8 million to non-defense contractors who do work for the government, according to Treasury estimates. Those payments would also be put at risk if the government were forced to juggle payments to meet its debt obligations. And when people don’t get paid on time, they wonder whether they should bother to report to work. That leaves open the possibility of service disruptions at the federal government.
●It might become more difficult to get a job. With less money coursing through the economy, consumers’ economic activity could slow. Consumers might hold back on spending. That in turn would give businesses even less confidence to hire people during a time when the economy is already growing at an anemic 1.3 percent. Anyone standing in the unemployment line could find it increasingly difficult to land a job.
An outright default on U.S. debt could send even stronger shock waves through the economy, buffeting the job rolls even more .
●It could become more expensive to get a loan. If the governments defaults on its debt, investors would demand that the Treasury pay them a higher interest rate to compensate for the added risk of lending money to the United States. That would send interest rates higher on mortgage loans, home equity lines of credit and car loans, because Treasury rates act as a benchmark for these and many other types of consumer loans.
●Retirement portfolios might take a hit. Stock markets had remained relatively calm throughout the debt-limit negotiations because investors had priced in a very low probability of a default. But as the deadline approached with no deal in sight, markets posted their worst weekly performance in more than a year and major stock indexes ended July on their longest monthly losing streaks since the height of the financial crisis in 2008. If the United States defaults, retirement portfolios could take a hit, perhaps just as bad as the one in 2008.
●Local improvement projects could get delayed or cancelled. Moody’s Investors Service, a major credit rating agency, has said it would review 177 municipal governments for possible downgrades if the federal government loses its pristine credit rating. That could make it more expensive for local governments -- including Montgomery, Prince George’s and Fairfax Counties, as well as other localities with close ties to the federal government, contractors, and employees -- to borrow money to build roads, schools hospitals and other important infrastructure projects, if they don’t delay or cancel them altogether. And the federal government itself would have less money to spend on infrastructure projects since experts estimate that loss of its top-notch credit rating would tack on $100 billion dollars in annual interest costs to the federal budget, crowding out other priorities such as transportation, education and health care spending.