With just 3 days to go until the August 2nd date for "default", and with no agreement in sight, let's take a look at exactly what will happen if no deal is reached and the credit ceiling does not go up.
First of all, despite claims from President Odrama, the US will not default on its debts. There is plenty of cash to pay our creditors. And medicare. And social security. And the military. But not all government functions will be able to keep going - in fact 40% of the federal government will shut down. Inconvenient perhaps, but not Armageddon.
Many news organizations, even Fox News, have pointed to the decline in the stock market last week as a sign that investors are concerned about the debt ceiling. As a professional working in the financial sector, I can say with some certainty that the markets are not worried that the federal government won't be able to continue spending money it doesn't have. The markets are concerned that the economy is limping along at best. Weak GDP numbers are the issue, not the debt limit.
Another theory is that investors are concerned that without a debt ceiling increase the credit rating on US debt will decline, raising interest rates across the economy. But the markets understand that a downgrade of debt is going to happen no matter what. No plan currently under consideration in congress addresses the $14 TRILLION debt problem to the satisfaction of the credit agencies. If anything, the markets are reacting to the increase in interest rates that are inevitable after years of over-spending.
So what would happen if we shut down 40% of the government and the sky did NOT fall? I think this is actually the biggest fear of the Democrats. In three days it looks like we will have an answer to that question.
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