Sunday, July 24, 2011

Preparing Your Employees for a Default?

While we (and nearly everyone else) still believe the Debt Ceiling Show in Washington is just more political theatrics in anticipation of a new show rolling into town next year, there is always a chance one of the actors might accidentally slip off the stage and fall to his death inadvertently taking an audience member or two with him.

You, me and your employees are all in that audience, front row.

So what if we are wrong and egos won't let either side pull out of the tailspin? What if there is an actual default on U.S. sovereign debt?

I'm not sure what would happen, but if this goes on much longer, it would be a nice thing to know and educate your employees on the possibilities, all of which affect them.

Most likely a default on U.S. debt would result in a downgrade of that debt from AAA to something less which, in turn, would result in higher interest rates the government would have to pay to service its massive debt which now approaches 100% of GDP, making further defaults more likely as more bonds reset at those higher rates. (Watch your toilet flush and you'll get the idea.)

So what?

Well, here is so what: interest rates for everyone would likely move up in tandem. Corporations would find it more difficult to borrow, expand and hire, as if they are hiring anyway. Higher rates would result in higher interest being charged for mortgages, pushing the housing market off the edge on which it has been teetering ever since we were told "the recession is over." Credit card interest would likewise rise making it more difficult for the consumer to consume, putting more pressure on business that makes widgets for consumption. This all would lead to an even softer job market, more layoffs, and unfortunately that is where your employees might enter the picture.

Most employers will not broach the subject at all even if there is a default. They will either find it too political or not in their best interest to warn the audience, their employees, of the actor that just fell off the stage. A few will address the topic, educate their workforce, let them know what the contingency plans are for the company, and, if they can say it and mean it -- how the company is going to try to protect its employees and their jobs in the event we hear that dull thud all the actors are still professing to avoid even as they wander nearer to the edge of the stage.



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