The good folks at the PEW Charitable Trusts prepared a great document that explains one of the top 3 debates in the country right now.
Namely, should we raise the debt ceiling or "strategically default?"
The consensus of the report (it seems to us) is that if we don't raise the ceiling, the U.S. will default on some of its payments -- probably not the debts to foreign holders of securities, but Medicare payments, Social Security payments, some debts will go unpaid if the debt ceiling isn't raised by August 2nd -- and the effects of even a "strategic default" will be negative to an extreme. The two big ones:
Short term interest rates will likely go up
Foreign governments will likely view the defaults as a sign that we can't meet our obligations, regardless of whether or not we meet our obligations to them. We've always been able to, so it might be catastrophic
1. What is the federal debt?
If the federal government does not collect enough revenue to pay for all its spending obligations, it must borrow to make up this shortfall; the federal debt is the accumulation of such borrowing in our nation’s history. Federal debt includes all securities—including bills, notes and bonds—issued by the U.S. Department of the Treasury and other government agencies.
There are several different ways to measure federal debt: Publicly-held debt includes all federal debt held by private investors--including individuals, corporations and foreign governments. As of June 24, publicly-held debt totaled $9.74 trillion.
Intra-governmental debt includes the debt that Treasury owes to accounts within the federal government. Much of this debt results from surplus in the Social Security trust fund, which is required by law to be invested in federal securities. Intra-governmental debt amounted to $4.61 trillion as of June 24.
Gross debt is the sum of publicly-held and intra-governmental debt. Since May 16, gross debt subject to the debt limit has totaled $14.294 trillion.
2. What is Debt Limit?
The debt limit (also called the debt ceiling) is established in law and limits the amount of gross debt that the federal government can issue. First enacted in 1917 as a condition of allowing the government to issue bonds during World War I, the debt limit has been increased throughout the past century; according to the Government Accountability Office (GA), the debt limit has been raised 74 times since 1962, including 10 increases in the past decade. The debt limit is currently set at $14.294 trillion dollars.
3. Have we reached the debt limit?
On May 16, 2011, Secretary Treasury Timothy Geithner announced that the government had reached its statutory debt limit. However, despite reaching the limit, the federal government can take various actions to prolong its ability to borrow. For example, the Treasury can draw down its cash balances to avoid issuing new debt. In addition, the Treasury can suspend investments and redeem securities in certain accounts, including the Civil Service Retirement and Disability Fund and the Government Securities Investment Fund, which provides the government with additional funds to meet its obligations. These and other measures will enable to government to not exceed the debt limit until about August 2nd (according to Treasury estimates).
4. What is a default?
According to the Treasury, a default occurs when the federal government is unable to meet any of its legal obligations because of a lack of funds-- including payments to holders of federal debt, salaries for federal employees, tax refunds, payments to recipients of Social Security and Medicare as well as many other commitments. If the federal government reaches the debt ceiling and its obligations continue to exceed revenues, it eventually will be unable to make some payments.