July 21, 2011, 12:50 PM — Caveat: I'm not an economist; I am, however, the descendent of CPAs and government planners.
Should the US Government not lift the Federal Debt Ceiling, a number of short and long-term effects occur. Some have a direct, while others have an indirect effect on IT in the US. The sequence of events would be that on August 2, 2011, the US Government would need money and then bounce against the ceiling of being able to borrow it. When revenues don't meet obligations, the head of the US Treasury Department, currently Timothy Geithner, would assume an active paymaster role to dole out policy regarding US Government debt service and bill payment.
The US Military, and those living under Social Security are likely to receive uninterrupted funds. Social Security comes from a different pool of money, and no one believes that the armed forces payroll wouldn't be paid. After all, we're in three wars—Afghanistan, Iraq, and Terror. Paying soldiers is a wise idea.
But for IT, the economic uncertainties will bring a climate that IT is already familiar with: lots of rapid change. Short term, as the government increasingly loses cash flow, obligations likely can't or won't be paid, and may be partially paid or delayed. Geithner has wide latitude in the policies of what will be paid versus unpaid, versus paid in deferment. What happens then—Geithner's decisions—will become the crux of enormous national debate and litigation. An atmosphere of acrimony will ensue as various oxen are gored. For IT, the largest amount of action will take the form of something we've seen twice in the past ten years: screeching halts to growth, and a budgetary siege mentality.
It's likely, given other economic bad news in the past five years as a trend, that stock markets would tank and IPOs would likely be out of the question for the foreseeable future. Stock indexes will likely become mercurial after they crater, and a stable recovery may take a while. Short term, organizations will likely move into high-cash-conservation-mode, meaning no new hires, cancelled projects and reduced large capital asset acquisitions, or expansions. Organizational overheads will likely be cut to stem cash burn. This means layoffs, perhaps permanent ones. IT organizations are familiar with the fallout.
Interest rates will go up, even if the Federal Reserve tries to dump money by lowering its base interest rates as US Government debt, now a rock solid commodity, will become worthless as the US Government's ability to pay the debt or obtain more is handicapped by lowered debt ratings. An inflation spiral potential is possible. Money will tighten up, and prices, especially capital asset commodities that IT is familiar with, will likely climb as interest rates climb. IT will be pushed even further towards using cloud resources and other “disposable” short-term strategy components.
New product introductions will likely be stanched, as the economy is rocked. An international stock market ripple effect will likely crater Asian and European markets as well, damaging already fragile recovery from the 2008 crisis. A fragile Euro, hammered due to member country economic malaise (Ireland, Portugal, Spain, Greece, and to a lesser extent, Italy) may crash. The Japanese Yen, already buoyed, will likely skyrocket. The Chinese and Korean currencies, however, are likely to also crater. Prices are likely go whacko until the currency adjustment dust settles. International organizations will juggle monies like never before.
Various costs of business will have to rise, as a desperate need will become finding revenue, and IT budgets are caught up in new fees. Issues that have been off the table, in terms of US Government fees and funding sources (note that I haven't used the word “taxes” so far) will be sought urgently. These may include hikes in fuel taxes, sin taxes, airline fees, US parks entrance fees, and perhaps an Internet sales fee. Theories of revenue that have been off the table for decades may re-emerge anew. Fees will have to be written into software, and accounted for.
A ripple effect occurs, due to the interconnected funding at state, regional, and local levels. Inability to pay obligations to states and municipal governments will force those bodies to additionally seek hikes in revenues. State taxes and revenues will be needed to also offset higher usury because of overall bond rating drops and the additional costs that will mean for state, regional, and local governments, although how much federal versus state obligation ratings is in dispute. Bond rating drops, with incumbent increases in payback over their term, may also contribute to inflation.
In my three decades of experience through several recessions (most of it in IT-related concerns) I've seen many economic changes, but few that were this predictable. Wise CEOs and organizational heads will tighten up like a drum and go into survival mode. IT often becomes the henchman, then faces its own ax. I hope an equitable deal is reached. We can't keep doing this.
