Once again, the US is approaching its self-imposed “debt ceiling”, and once again, it looks like a last-minute deal will be the only way to avoid a default. Unlike previous debt ceiling near-misses, this time House Speaker Kevin McCarthy seems unlikely to accept a deal to raise the debt ceiling that doesn’t include deep, draconian across-the-board cuts in federal spending.
And this is really what the debt ceiling was intended to do. Congress can reduce debt, deficits, and spending whenever they choose to, as the Constitution gives them and only them this authority. Creating a “debt ceiling” was a way for them to avoid having to make any hard choices themselves. Whenever Congress likes the current President, they can raise the debt ceiling without issue. And when they don’t like the current President, they can use the threat of the debt ceiling as a hostage to force the President and Treasury Department to make deep and unpopular cuts to social programs or default on the country’s bonds.
While a default isn’t guaranteed, it remains a possible outcome, and some politicians seem to be absolutely salivating at the idea of making workers suffer. And the most likely path to avoiding a default almost certainly will involve deep spending cuts, which would have a similar effect to a default on most folks.
But what kind of impacts could be felt by our local community here in Ellijay as a result of this mess in DC?
The largest impact of this would be felt in our local economy. Either a default or a deal including deep spending cuts would likely lead to a reduction in federal grants and support to various local initiatives, including infrastructure projects, education programs, and community development.
This could slow down progress and hinder our town’s growth. The kind of road repaving and fiber internet expansion we’ve been seeing lately in Gilmer county isn’t cheap and without significant federal funding, such projects would likely slow down or be halted entirely.
Another consequence to consider is the impact on interest rates. Interest rates have risen sharply over the past year or so, because raising rates and inflicting pain in the economy is the only means the Federal Reserve considers viable to get inflation under control. A debt default would cause a contraction in credit throughout the entire economy.
Banks hold most of their reserves in Federal bonds like Treasury bonds, which are treated within the financial system as the most rock solid asset available. Its seen as taking a bet on the indefinite continued existence of the US government, and if you lose that bet, you have worse problems than not getting paid back for your bonds. A default by the Treasury on even a portion of these bonds would send banks into a panic. If even government bonds are at elevated default risks, mortgages, car loans, small business loans, credit card loans, and all other forms of debt start looking a lot more dangerous as well.
Banks would dramatically reduce their lending, resulting in higher interest rates for anyone that needs to borrow. This would make things that much more challenging for average people to obtain loans for important purchases such as homes or starting businesses, at a time when inflation has already made affording big-ticket items much more difficult.
It would also lead to higher borrowing costs for local businesses, potentially impacting their ability to expand and hire new employees. When this happens broadly, recession is imminent, and the signs throughout the global economy pointing to a slowdown are becoming more and more glaring already anyway.
We’ll be following this and other stories related to the global economy here at New Ellijay News, tying these developments to our local economy, and helping keep you informed in this time of great economic turbulence and uncertainty.