Cheat Sheet: Debt ceiling consequences
Billboard featuring U.S. debt clock on July 11, 2011.
July 18th, 2011
07:12 PM ET
3 years ago

Cheat Sheet: Debt ceiling consequences

Capital Hill (CNN) – What exactly would happen if Congress does not raise the debt ceiling before Aug. 2?

In this week's American Sauce podcast, we lay out the specifics, including why August is particularly a difficult month for this to happen. We also summarize the debt negotiations so far through the eyes of two Hollywood screenwriters. Listen here.


Leave comments below.

Or follow our cheat sheet.

What Happens if Congress Does Not Increase the Debt Limit?
Basics
-No one knows the precise scale of the impact. This is unprecedented.
-But there is broad agreement that hitting the debt ceiling would raise interest rates and lead to immediate, dramatic cuts in government spending.
-Nearly all agree there is risk of harm to the financial markets. There is wide debate over how great the risk is and how much harm would be done, though many, including House Speaker John Boehner, R-Ohio, say if the markets are jumpy it could lead to "catastrophe."

Background

-Congress has until Aug. 2 to raise the debt ceiling without negative consequences
-After that, the government could not borrow funds and would rely solely on incoming revenues.
-Currently, the U.S. borrows approx. 43 percent of the money it spends. (Source: Office of Management and Budget)
-Technically, the United States has already hit the debt ceiling of $14.29 Trillion. But the Treasury has some limited ability to buy extra time, using what Sec. Geithner calls “extraordinary measures”. (What are they? Check out our podcast and cheat sheet here.)
–The Treasury says those “extraordinary measures” will be used up by Aug. 2. Thus if Congress doesn’t act by that date, the United States would actually feel the collision of hitting the debt ceiling. Treasury could no longer shield the country from the problem.

Government
-The federal government would immediately see spending ability cut about 43 percent.
-Treasury Secretary Geithner and his agency would decide which bills get paid first.
-Most experts, and Wall Street, expect the government to pay interest on the debt first. (See "markets" below.)
-After that, the Bipartisan Policy Center estimates Treasury will have to cut 50 percent of spending. Immediately.
-That would force the Treasury to decide between major programs.
-Example: if the U.S. hits the debt ceiling, government could fund Social Security, Medicare, Medicaid and unemployment benefits, but would not have money left for anything else. Thus, no funds to pay troops, secure airports, run prisons, protect nuclear sites, pay any federal civilian worker or run the rest of government. (Source: Bipartisan Policy Center)
-There is some debate over whether funding problems would shift daily, with each day's revenues, or if Treasury could approach the problem more broadly.

Markets and Finances
-The federal interest rates would certainly increase.
-This would happen for at least two reasons: 1) Credit agencies would downgrade U.S. debt and 2) In August nearly $500 billion in U.S. bonds will mature. The Treasury would need to raise interest rates to resell that debt in the middle of a fiscal crisis.
-Those interest rate increases would ripple through the economy, affecting mortgages, car sales and the cost of any new loan.
-Some argue that even if Congress later raises the debt ceiling an interest rate hike would be lasting.
-It is not clear how much interest rates would increase or how fast.
-The interest rate rise and the lowered confidence in U.S. debt could cause financial markets to drop. This is a heavily debated point. Some conservatives, including Rep. Michele Bachmann, R-Minnesota, argue such talk is a scare tactic. But House Speaker John Boehner told Fox News he is concerned that markets could get "spooked" and spiral into a "catastrophe."
-The U.S. dollar would certainly lose value.

Did we forget anything? Goof something up? Leave a comment below.

Follow on Twitter: @LisaDCNN

Listen to the podcast here.
You can also listen to American Sauce on iTunes, Stitcher or subscribe to the podcast via RSS.

CNN's Dan Szematowicz and Emma Lacey-Bordeaux contributed to this report.


Filed under: American Sauce • Debt • Deficit
soundoff (15 Responses)
  1. Four and The Door

    Although I hope congress and the administration come to agreement about how to raise the debt ceiling, I have to say the idea of having it has worked like a charm. When the government can't keep the amount of debt it runs up below a limit that the current administration set, it should be a gut-wrenching, difficult experience. People should call into question what is going on, who is responsible and what needs to be done to get back in control. Things should change. Priorities should be identified. And that is exactly what is happening now. It works. It is time to fix what is broken in federal government financial management. Spending needs to be cut. Now.

    July 18, 2011 07:27 pm at 7:27 pm |
  2. S.B. Stein E.B. NJ

    I heard someone who described himself as a tea party person who thinks the debt ceiling should be raised on NPR's talk of the Nation this afternoon. He made the point that everything would cost more and there would be unforseen reactions to the non-raising of the debt ceiling. I think that he has well placed concerns that I agree with now.

    July 18, 2011 08:47 pm at 8:47 pm |
  3. Name chasity brown

    Does the politics know what would happen if they cut social security, medicare, unemployment. NO ONE on these programs would have a home car or money so what would happen to the economy then.

    July 18, 2011 09:20 pm at 9:20 pm |
  4. Anonymous

    If they do not pay social security then we will not have medicare as it comes out of social security then old people will be put out on the street from nursing homes and people will have to leave the hospital as they have no insurance. All the disabled will not have health coverage and no one in washington cares about the elderly anymore and we all know that for a fact. It is a sad country that does not care for the elderly.

    July 18, 2011 09:33 pm at 9:33 pm |
  5. Anonymous

    Five countries said they do not need nor do they want our aid and we said they have to take it. Somehow I am missing something when we are giving foreign aid and need aid ourselves

    July 18, 2011 09:35 pm at 9:35 pm |
  6. lurch

    Yeah you did! No college kid in line for pell grants would get their money for school. People would have to drop out and then could. Not graduate. That would force student loans to start needing 2 be paid back. If u can't graduate then we can't get a good payin job 2 pay back those loans.

    July 18, 2011 09:40 pm at 9:40 pm |
  7. Mucho Gaseous

    Obama will choose DEFAULT, this will create a crisis, which he will blame the Repubs.
    In the meantime, the people will riot and Obama will declare Marshall Law.
    His main goal is Socialism or Death of the USA.

    July 18, 2011 10:38 pm at 10:38 pm |
  8. truthman

    What amazes me about the debt is not how big it is, but how fast it is growing. Do you realize that our gov't almost spends twice what it brings in? And that isn't even enough, it wants to spend even more? Hallelujah! How can you spend twice what you make month after month, and when your pay starts going down, ask to spend even more? Unbelievable! Just unbelievable.

    July 18, 2011 10:45 pm at 10:45 pm |
  9. truthman

    Our debt is just unbelievable...totally unbelievable.

    July 18, 2011 10:48 pm at 10:48 pm |
  10. truthman

    I wouldn't be surprised if the credit agencies downgrade U.S. debt even if we raise the debt ceiling. How much more can it grow before just the payments alone crush us in this stagnant economy?

    July 18, 2011 10:53 pm at 10:53 pm |
  11. truthman

    Mr. Prez and Congress, what is Plan B? Retire to Canada?

    July 18, 2011 10:54 pm at 10:54 pm |
  12. Aaron

    Congress may not realize the extent of a full Federal shut-down, or maybe they do, which makes this game of chicken between the parties silly, and dangerous. Other things that would need to stop in the event of losing 50% or more of spending: Per the Bureau of Labor Stats, the vast majority of air traffic controllers are employed by the Federal Aviation Administration (FAA), an agency of the Federal Government. In the worst case of being unable to pay federal employees, all air traffic in the US would come to a halt. No Customs employees would clear any freight, leaving stores that sell imported goods with shortages, not to mention leaving oil tankers sitting on the water unable to discharge their cargo. The great plan to export our way out of crisis would also stop because there would be no one facilitating exports (no Customs employees to process export declarations, no Dept. of Commerce employees to issue export licenses). Would the Federal court system function? And how about all the other agencies whose services we rely on heavily, even though they operate with a lot of anonymity: The FDA, the Consumer Product Safety Commission, the SEC, CFIUS (who reviews the national security impact on foreign investment in the US), the EEOC, USDA inspectors, Federal Park Service employees, and the myriad of other things that would have to just vanish.

    July 18, 2011 11:11 pm at 11:11 pm |
  13. Quinn

    I heard discussed that there may be a potential plan to raise the debt ceiling in an incremental amount to get us through the 2012 election cycle. We didn't elect or "hire" these politicians to plan for their next election. We hired them to make decisions. Time for term limits!

    July 18, 2011 11:30 pm at 11:30 pm |
  14. John

    This national debt clock is grossly misleading. Our Family's Share isn't the whole debt divided by the population of the country.

    The more you earn, more taxes you pay. Big corporations pay (or should pay) much more taxes. So, your actually share is very small. Most of the money is concentrated on a small slice of the population.

    July 19, 2011 03:29 am at 3:29 am |
  15. Gordon West

    You didn't mention the impact of all those federal workers who wouldn't be getting paychecks and so wouldn't be spending money in their communities, maybe missing mortgage, credit card, and other payments, thus depriving those folks of money to pay for their expenses, and so on. At such a scale the cascade of failures to pay would affect everyone.

    July 19, 2011 08:45 am at 8:45 am |