The Debt Ceiling: What happens if we hit?

We’re getting closer to our self imposed limit on the national credit card. The current debt limit is around $14 trillion. According to pronouncements from the Treasury, the government is spending money so fast that we are going to hit that limit on August 2, about two weeks away. As things stand now, neither side of the negotiations on the budget is giving way.

Once we lose the ability to continue tacking on more debt to the debt we already have, the US will default on its debt for the first time in the history of the country. The financial Apocalypse will have arrived.

Sort of. Because many people in this country have hit their individual debt limits. It’s called getting your credit card refused, or being denied for refinancing. But for a lot of those individuals, maybe most of them, being unable to dig the hole deeper doesn’t in and of itself require a default.

After all, it’s not as if the government is not still taking in tax revenues. My employer will continue tax withholding. Self employed individuals will continue making quarterly estimated tax payments. There isn’t going to be a complete shutdown of the Federal government. What there will be is a partial shutdown of the Federal government and Federal transfer payments.

One thing for sure is that the top priority for the money coming in is to continue making interest payments on existing government bonds. After all, if you stop making interest payments, the lenders won’t be too keen on loaning you more money after the debt ceiling problem is straightened out. Actually, the government will continue to sell bonds even without an increase in the debt ceiling. The money taken in from those bond sales will be used to pay off older bonds that are coming due. So first demand on the revenue will be to the bondholders.

Now, if you are making interest payments and paying off maturing bonds, I’m not even sure you can call it a default at all.

On the other hand, the Federal government is currently spending 40% more than it is taking in. Hitting the debt ceiling may not cause a default, but the immediate cuts required would entail huge disruptions to the economy. Either way, I’m not anxious to try it.