Depending on who you are and what you do for a living, the effects of not raising the debt ceiling are very different. While those effects are (happily) still largely theoretical, we've parsed the best thinking to help you anticipate when the giant snowball that is default on the government's debt will absorb and demolish you. Which it would.
That's because the debt ceiling (or debt limit) is an artificial ceiling that poses enormous economic risks. It sets a limit on the amount of money the government is allowed to borrow in order to pay its bills. Bills is the key word there; this is simply a limit on the ability to pay outstanding debt. Which means that a failure to lift the debt ceiling means we can't borrow more money, which means that we can't pay creditors. Which means that the United States of America's near-perfect credit history is shot, resulting in an enormous amount of uncertainty, higher long-term interests, more difficulty in borrowing money, more expense. At a minimum.
In order, here's how the negative effects of not raising the debt ceiling would trickle out through the economy.
Affected first: People who get pay or benefits from the government
If you are a person who relies on the government for money, the best-case scenario overall means that you'll be the first to get the shaft. That's because, if possible, the Department of the Treasury would cut off payment to those folks — members of the military, people relying on Medicare, etc. — before anyone else.
When we outlined why the key date is October 17, we noted the ebb and flow of the Treasury. On any given day, money from income and corporate taxes and other sources flows in; money moves back out to pay bills. Treasury Secretary Jack Lew estimates that the the 17th will be the first day on which the amount we bring in, combined with the amount we have on hand, will be insufficient to pay off the bills that come due. Goldman Sachs, which for obvious reasons is watching this closely, suggests that there's a little more time than that before things start getting really rough. But if we can't borrow more money, bills will come due that we can't pay.
So the question is: Can Treasury choose to pay some bills before others? Could it, for example, choose to hold off on paying soldiers so it could pay off the interest on its existing loans (keeping those financial markets happy)? As our colleague Matt O'Brien at The Atlantic noted last month, even this would have a devastating effect on the economy, but could allow the government at least some room to maneuver if a debt ceiling increase could happen quickly. For the soldiers and elderly and employees and so on that rely on those payments, this would of course be devastating. "[C]utting 32 percent of federal spending overnight would certainly make things look real grim real fast," O'Brien wrote. "Indeed, that much austerity would cost us millions of jobs at an annualized pace." (Still from a sailor surprising his grandpa via YouTube, above right.)
O'Brien also points out that banks rely on short-term borrowing to pay bills. When the government flirted with default during negotiations over the debt ceiling in 2011, interest rates for doing so spiked dramatically, meaning that the cost of such loans for banks increase as well. Vastly higher costs for banks on routine activity has obvious repercussions in the broader economy.
Now, keep in mind, both of those things are in the best-case scenario in the event Congress doesn't raise the debt ceiling. If the Treasury can prioritize how it pays its bills, ignoring some of them, this is what would result.
But as Business Insider points out, Treasury probably can't do that. There is "no legal basis" for choosing to take care of its interest payments before SEAL Team Six. But moreover, it would require jerry-rigging some way of dividing up its millions of daily transactions in order to only pay those bills that were least likely to make the snowball of economic calamity grow bigger. It's safe to assume, then, that everyone would suffer at once, even if in the best case everyone suffers eventually. (Photo of JPMorgan Chase chair Jamie Dimon via Associated Press, above right.)
Third: Holders of government debt
Next to feel the pain (well, probably simultaneously, really) is those to whom the government owes interest payments on debt and bonds. At some point, they're likely not to get paid. Even in the best-case scenario, there will be days on which there isn't enough money to pay even the high priority recipients as Business Insider points out. So the negative effects of having at least some Treasuries go into default are almost certain.
Yahoo News reports that those holding the debt aren't who you might think.
[Richard Bove, VP of research at Rafferty Capital Markets, says,] "The first, biggest owner (of U.S. debt) is the social security fund, so you'd have all of these people who are receiving social security payments who now have to question whether they'll get their payments."
Clearly, that would cause a huge disruption to millions of Americans. But Bove says that is only the beginning since the second biggest holder of Treasuries (at about 12% of the total) is the Federal Reserve, which has "91% of its assets backed by U.S. government debt."
Fourth: People who participate in the American economy
Bloomberg's what-if headline: "A U.S. Default Seen as Catastrophe Dwarfing Lehman’s Fall." Reporter Yalman Onaran spoke with a number of experts, who provided one consensus: "Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a U.S. default as anything but a financial apocalypse." This story is loaded with devastating details, including mentions of nuclear weapons, chaos, and economic depression.
The problem is largely two-fold: Things would get bad, and then concern would make the bad things worse, in a cycle. Economic markets would be upended, with new costs, an upending of long-understood priorities, and the effects of a huge pull-back of federal economic stimulus. People's confidence in the economy would almost certainly plummet, exacerbating the negative effects on businesses. Essentially, no one would be left untouched. According to Goldman Sachs, a default could erase 4.2 percent of the nation's gross domestic product over the course of the year — with a quarterly decline even more severe than that. That's a level that's hasn't been seen since World War II.
The good news, at least, is that banks are somewhat prepared for the possible calamitous failure to increase the debt ceiling: they're stocking ATMs with added cash for use in our post-apocalypse economy. (Though it may not be backed with anything.) (Photo from The Price Is Right via Associated Press.)
Fifth: Republicans up for reelection in 2014
One of the likely longer term effects could be a slight decline in electoral prospects for Republican candidates in the 2014 mid-term elections. If nothing else scares Speaker John Boehner's caucus into resolving this issue before October 17, maybe that will.
(Photo of Texas Rep. Louie Gohmert via Associated Press.)