U.S. Drowning In Debt: Can Small Business Survive?

The Great Recession began in 2008 as the housing market crashed, a victim of excessive speculation and overbuilding. Our national debt then was under 40% of our Gross Domestic Product, a measure of our national income. Next year, that national debt will exceed 100% of our national income. Interest payments on this debt come directly out of tax revenues. As chunks of the debt come due, we must borrow new money to replace it. Although interest rates are currently low thanks to Federal Reserve policy, that will not always be the case and we will be paying higher interest rates to the holders of our national debt which will continue to grow by the amount of the federal budget deficit every year. 

Small businesses must compete for funds with large firms and with the government, all who want a piece of the available pool of savings. Community banks are major providers of loans to small firms, larger banks favor other investments than loans to small firms. Major auto finance companies borrow funds in order to provide loans to consumers purchasing their vehicles. The federal government soaks up trillions of dollars by selling Treasury Bonds to investors like 401k and insurance company funds.

Since the start of the NFIB surveys in 1973, owners have reported average interest rates on their “short-term” loans ranging from a high of 19% in 1981 to a low of 4% this year. A record 12% of all firms, most of which were not borrowing, reported credit harder to get in 1981 compared to 4% this year. Only 3% reported this year that they did not get all the credit they wanted while 53% said they had no interest in a loan. The Federal Reserve has kept interest rates low and credit available, even for small firms.

For savers, the news is not good. It is difficult to build a safe retirement fund with 10 year Treasury bonds yielding less than 1% interest (for individuals and for fund managers and insurance companies managing consumer savings). The artificially low interest rates have pumped up the stock market, compelling us to accept stock market risk to get a better return on our savings. For most small business owners, their investment is in their own firm, no stock market risk in that. Their major concern is the strength of the economy – sales. Recently 14% reported that their sales were at pre-crisis levels or better. But 20% said sales were less than half of pre-crisis levels. Firms that are permanently closed don’t respond to surveys, almost 400,000[1] have recently declared bankruptcy. The economy needs to continue to open up and consumer spending to increase to provide the sales needed to grow the small business sector.

[1] American Bankruptcy Institute. Bankruptcy Statistics. Retrieved from: https://www.abi.org/newsroom/bankruptcy-statistics