Nobody really knows what will happen if we breach the debt ceiling because it's never happened before. And everyone worries that it will be awful because nobody's created any legal provision for not making it awful.
A breach is sometimes characterized as a default on the national debt. But it's actually weirder than that. Normally the way things work is that the Treasury Department cuts the checks Congress has told it to cut, collects the taxes Congress has told it to collect, and borrows to cover the difference.
But the statutory debt ceiling also instructs Treasury not to borrow more than a certain amount of money. When we hit the debt ceiling on Oct. 17, Treasury will lack the legal authority to borrow any more money to close the gap between spending and tax revenue.
At that point, there are basically three options.
One is President Barack Obama could decide that the government's legal obligation to spend (and certain elements of the 14th Amendment) trump the statutory debt ceiling, and just order the Treasury to sell more bonds.
The second option is Obama could instruct the Treasury to pay some of the government's bills and just not pay the rest.
The third option is to pay nobody.
All three of these options face the same basic problem of seeming to be illegal. (The second one also faces the problem that Treasury says it lacks the logistical capacity to do it.)
The general consensus is that the third option would, among other things, provoke a global financial crisis by causing a default on U.S. Treasury bonds — bonds that are meant to be the safest asset in the financial system. The first option may avoid this fate, but perhaps not.
It's difficult to imagine financial markets would be undisturbed by the prospect. And in general, simply nobody knows what anyone should do about anything if the debt ceiling is breached. Unlike with the shutdown, there is no overriding Office of Management and Budget guidance. There are no rules to spell out essential versus nonessential services. Officially, at least, there's no contingency planning at all. It's just a kind of terrifying world of uncertainty.
A debt ceiling breach is unprecedented. There's no guarantee that it'll lead to a worldwide financial panic and a massive global depression, but there's honestly no guarantee that it won't. Nobody knows what will happen, and you should find that prospect terrifying.
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