Debt Ceiling: Effects, Agreement and Local Reaction

Though it's not a done deal until the U.S House and Senate vote, it seems as if Congress will avoid national default on Tuesday.

According to the Huffington Post and CNN, President Barack Obama and congressional leaders reached an agreement Sunday to raise the debt ceiling while cutting spending and reducing deficit. A vote is expected by Congress Monday to beat the midnight deadline.

But if a deal to raise the nation’s deficit ceiling is not reached by the Tuesday deadline, the sky will not fall — at least right away, said Ben Herzon, a senior economist with Clayton-based Macroeconomic Advisers LLC. 

“We expect a more benign scenario,” said Herzon of the 28-year-old company that provides national economic forecasting and modeling to investment banks, government agencies, Federal Reserve officials, pension funds, manufacturers and others. 

Recently, Macroeconomic Advisers provided its clients with an analysis about what it believes would occur if the deficit agreement is delayed one month. The company shared the four-page analysis with Patch. Herzon provided additional clarification, and his own opinion.  

Below are some of the possible consequences.

Unemployment will increase to 9.6 percent by the end of the year.

The company believes unemployment will increase by 4/10 of a percent in the second half of this year. This translates to about 600,000 people without jobs because of the delay, Herzon said. “But a far larger number of people are likely to incur higher interest expenses,”  he said.

It will be more expensive to borrow.

We will see a temporary but “modest” increase in borrowing costs indicated the company publication. “But once an agreement is made, the increase would go away,” Herzon said.

The stock market will temporarily decline by about 5 percent.

Because the stock market will be negatively impacted by the delay, household wealth will decline, and those heavily invested in equities, especially persons about to retire, will have less.

“The decline in the stock market would quickly be reversed, so the only ones hurt would be those who needed to ‘cash out’ for the month or so that the stock market would be down,” Herzon said.

Civilian and military pay would be delayed.

The U.S. Treasury is responsible for prioritizing payments, and its first goal is to meet all interest obligations on time. Between Aug. 3-31, the federal government has about $307 billion of payment commitments and about $172 billion in revenues.

According to Macroeconomic Advisers’ published analysis, $172 billion in revenues “is enough to cover interest payments on the debt, payments to defense contractors, Social Security benefits, Medicare benefits, Medicaid benefit, and unemployment insurance for the month.”

Unfortunately, all other federal payments, including civilian and military pay would be delayed.  However, federal workers could face a three-week furlough.

Town and Country and Manchester residents shared their thoughts with Patch about some of those possible financial implications.

Patch spoke to several residents, many of whom didn’t want to go on the record to express their political opinions. Most of them leaned towards the conservative side saying they preferred if Congress didn’t allow the U.S. Treasury to borrow more money.

Manchester resident and stay-at-home mom Bonnie Krueger, who also blogs for Patch, said raising the debt ceiling would only unbalance the country’s budget even more. However, she also pointed out, if some type of deal isn’t approved by Tuesday, it could negatively affect all Americans, especially those who are less financially stable.   

“There’s not a good solution in all this mess,” Krueger said.

Krueger believes that if the government doesn’t stop spending, the United States’ international relations with other countries could be affected, a situation that may be detrimental for Americans in the long run.

Town and Country resident and Finance Director of the City of Town and Country Betty Cotner said she had mixed feelings about whether or not the debt ceiling should be raised; yet she was hopeful both parties would reach an agreement.

Cotner was invited to listen to Union National Bank economists speak about financial matters and the debt ceiling Friday during a conference call. Cotner said she felt relieved after speaking with them. UNB economists said that in case the country had to default, the nation’s financial system would weaken; yet it wouldn’t present a large threat to the United States’ economy.

“Economists said that other countries such as Japan have defaulted and it didn’t hurt them,” Cotner said.

Cotner believes that the bigger issue is eventually paying the federal debt. She said the United States shouldn’t continue spending without paying.

“Simplistically, any country who has that much of debt has to pay,” Cotner said. “It’s crazy how we got in this situation in the first place.” 

Cotner, as well as Krueger, feels that all the economic tumult in the country may affect other nations’ perceptions of the United States, and that regardless of the decision the senate and the house will make Tuesday, many Americans will be affected.

“We lose no matter what,” Cotner said.