The negative effects of hitting the debt ceiling could be mitigated by setting priorities for bill-paying, conservatives argue, but financial markets could still consider the US to have defaulted.
What would really happen if the US government hit the debt ceiling? We ask that question because there’s a lot of discussion in Washington about debt ceiling politics – who’s got leverage, who’s bluffing, who isn’t, and so forth – but much less talk about what the debt ceiling actually is.
And the phrase “debt ceiling” sounds final in an ominous sort of way. If Uncle Sam reaches this limit in late February, as now seems likely, would the federal government grind to a halt for want of cash?
Not entirely. Hitting the debt ceiling is not the same thing as shutting down the government by failure to appropriate funds. In that sense it would be a fiscal crisis wholly different from the Bill Clinton-Newt Gingrich budget fights of the mid-1990s.
In fact, it would be so different nobody actually knows what it would be like. It would be uncharted territory, tabula rasa, beyond the horizon there be dragons.
Some conservative fiscal experts say it wouldn’t be so bad – the US could shuffle through its bills, pay off the important ones, and muddle through like a home-builder with a cash-flow problem.
But many economists worry it would be a disaster. Financial markets – unstable as an emotional teen in the best of times – could judge that the US is defaulting on its debt, and swoon accordingly.
“This could result in significant economic and financial consequences that may have a lasting impact on federal programs and the federal government’s ability to borrow in the future,” concludes a Jan. 4, 2013, Congressional Research Service debt limit report.
Page 1 of 4