Posted on: July 22nd, 2011 by Stas

Whatever the outcome of the debt ceiling confrontation between Congressional Republicans and President Obama, unemployment will be getting worse.

The dismal June jobs data had already indicated that cuts in public spending were causing higher rates of unemployment among government workers. The impasse in Washington and the resulting spending cuts needed to seal an agreement on the debt ceiling will only accelerate the worsening unemployment of Americans.

In other words, a bad situation is about to get much worse no matter what agreement is finally reached.

At the same time, China has warned the United States that the failure to deal with the debt ceiling issue is causing a crisis of confidence for countries continuing to buy U.S. government securities.

This could drive the dollar down and raise the price of imported products further depressing growth and consumption.

Another reason unemployment is likely to get worse is higher interest rates. The debt ceiling controversy shows that some political leaders are willing to default on U.S. obligations for political gain. This scares foreign investors, such as China, and makes it riskier to buy U.S. government securities. That means higher interest rates, which will hurt middle class borrowers and small businesses.

Higher interest rates will also slow down what little economic activity was going on.

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