So what exactly happens if the US doesn't raise the debt ceiling

[The Minsky Moment]

If he prioritizes interest I don't see why the raters would downgrade.

Risk.
The legal status of doing that is questionable.  Treasury might be forced into unorthodox means to cover other budgetary items.  The prioritization may weaken pressure to reach a useful resolution and thus allow the fiscal position to deteriorate further.

it's called public "credit" for a reason.

[alfred russel]

Geithner says he won't or can't prioritize.  He is full of it.  If the ceiling isn't raised, he will in fact prioritize interest payments on debt and some other stuff. 

The biggest immediate impact is that all the rating agencies will downgrade US sovereign debt.

If he prioritizes interest I don't see why the raters would downgrade.

If I lend you money to buy a car, and you keep making payments to me but stiff other people who you owe money to, I'm going to start getting nervous.

[Agelastus]

Geithner says he won't or can't prioritize.  He is full of it.  If the ceiling isn't raised, he will in fact prioritize interest payments on debt and some other stuff. 

The biggest immediate impact is that all the rating agencies will downgrade US sovereign debt.

If he prioritizes interest I don't see why the raters would downgrade.

From an article on the subject I read only 5 minutes ago...

Debts have never been this big and credit rating agencies have never threatened to cut the US sovereign debt rating to a D - worse than Greece

Short answer? Everybody in world finance is shitting bricks at the moment at the thought of which domino is going to be the first to fall. Greece just dodged the bullet, but now investors are finding that what should be one of the most risk free countries to lend to has politicians who seem to be blinder and loonier than the average Greek street protester.

Not that I actually believe the credit rating agencies will go as nuclear as they say they will; but even a one or two point reduction in the USA's rating is going to hurt financially, and given the current world climate it would almost be irresponsible of the Agencies not to make such a reduction.

Or you could argue it would be irresponsible of them to make such a reduction; the credit ratings agencies are almost at the point of being in a "damned if they do, damned if they don't" situation.

[Sheilbh]

Geithner says he won't or can't prioritize.  He is full of it.  If the ceiling isn't raised, he will in fact prioritize interest payments on debt and some other stuff. 

The biggest immediate impact is that all the rating agencies will downgrade US sovereign debt.

If he prioritizes interest I don't see why the raters would downgrade.

S&P have already announced that US debt will get a significant downgrade if the debt ceiling isn't raised.  The issue with the US isn't the ability to pay its interest, it's the political system.

[KRonn]

I really think that the legislators will come to agreement before too much damage is done. This is getting pretty insane, this brinksmanship, risking pretty huge stakes in damage to US financial standing, and our esteemed great ones in the government certainly have to realize that, right??   

[Sheilbh]

I really think that the legislators will come to agreement before too much damage is done. This is getting pretty insane, this brinksmanship, risking pretty huge stakes in damage to US financial standing, and our esteemed great ones in the government certainly have to realize that, right??   

I think that a number of Republicans and a significant portion of their electorate actually think that default is better than increasing the debt ceiling.  I agree with Megan McArdle, who's no lefty, on this:
http://www.theatlantic.com/business/archive/2011/07/why-cant-the-gop-get-to-yes/241437/

[Agelastus]

I really think that the legislators will come to agreement before too much damage is done. This is getting pretty insane, this brinksmanship, risking pretty huge stakes in damage to US financial standing, and our esteemed great ones in the government certainly have to realize that, right??   

I'm not convinced several of them do realise that; but then that's true of a lot of politicians regardless of the political system they evolved in.

Consider Gordon Brown - I believe common wisdom is to pay down debt during a period of economic growth and good tax revenues so you can afford to take out more debt during a recession; Gordon Brown wisdom was "good tax revenues? Great, we can afford to borrow more!!!!!!!!!!!!!!!!!"

Well, that's how I see him anyway; if I were you, I'd be very .

[KRonn]

I really think that the legislators will come to agreement before too much damage is done. This is getting pretty insane, this brinksmanship, risking pretty huge stakes in damage to US financial standing, and our esteemed great ones in the government certainly have to realize that, right??   

I think that a number of Republicans and a significant portion of their electorate actually think that default is better than increasing the debt ceiling.  I agree with Megan McArdle, who's no lefty, on this:
http://www.theatlantic.com/business/archive/2011/07/why-cant-the-gop-get-to-yes/241437/

Yeah, I wonder about that too, how many feel a default is favorable over raising the debt ceiling. But I have to think that the leadership and most of the party understands the rather large and damaging issues that will ensue over a default, or even if the US comes close. So frustrating. The US hasn't had a budget since long before the 2010 election, which is problematic enough. Now getting this close, about 3 weeks away and getting close to the brink, is downright infuriating, especially given the problems that may occur even just cutting it too close.

[garbon]

Most of the answers in this thread seem rather inexact.

[Agelastus]

Most of the answers in this thread seem rather inexact.

I don't think anyone is really certain what will happen if the single largest debtor in international finance defaults; partly because no-one can really bring themselves to believe it will happen (I fall in that camp myself) and partly because the last time this this happened (the largest debtor defaulting) was in the Sixteenth Century* when the financial world was a lot simpler.

Edit:*Referring to Habsburg Spain; on reflection, a better comparison might be the series of defaults triggered by the Wall Street Crash.

[Baron von Schtinkenbutt]

Geithner says he won't or can't prioritize.  He is full of it.  If the ceiling isn't raised, he will in fact prioritize interest payments on debt and some other stuff. 

The biggest immediate impact is that all the rating agencies will downgrade US sovereign debt.

If he prioritizes interest I don't see why the raters would downgrade.

If I lend you money to buy a car, and you keep making payments to me but stiff other people who you owe money to, I'm going to start getting nervous.

But it would be OK if he made his car payments with a credit card?

[Monoriu]

Most of the answers in this thread seem rather inexact.

I think the biggest problem is the uncertainty of it.  The international financial system is so complex that you don't know exactly what will happen if you remove an assumption that nobody thought could ever be removed. 

[Jacob]

Alright, so what are the scenarios?

1. It turns out to be simply hardcore brinksmanship by the Republicans. A short while before it's absolutely too late, some sort of deal is reached and disaster is averted.

2. The Democrats cave completely and the Republicans get to push through most of what they say they want - severe cuts to the military, social security, medicare and medicaid while not raising any new revenue from anywhere.

3. No compromise is reached, the debt ceiling is not raised and default follows.

What happens next? Short, medium and long term, what are the consequences?

I've read a bit about the potential disaster that'll strike both the US's finances and the world economy in the case of option 3 - a default. I'm sure there are going to be all sorts of messes all over the world. I expect that lots of countries holding US debt would be pretty miffed; what would that mean geopolitically and for the internal politics of those countries? What would be the knock on effect for the economies of other countries, even if they're not directly exposed to US debt? Internally, how would the US voters react? It seems to me that something like that is likely to result in a sea-change in the political landscape, no? Who would the voters hold responsible for the debacle? Who would you hold responsible?

In the case of 2, with broad swathes cut through previously sacred entitlements, I expect the effect on the world economy would be much less severe. However, it would seem that plenty of Americans would be seriously affected. How would that affect the political landscape? The link upthread suggested that Democrats would quickly gain power to reverse the deep cuts; how likely is that? Do you expect any other serious changes to the political landscape in the US as a result?

As for case 1, the least serious one, what do you figure would happen? How big a segment of the voters would consider the brinkmanship irresponsible and punish the Republicans? How many would think they did the right thing and reward them? How do people view the Democrats in all of this? Is this a new way of doing politics, or will it quickly be forgotten?

Any thoughts?

[Admiral Yi]

2.  The Republicans haven't proposed any reductions to Social Security.  Obama has recently as part of his Grand Compromise.

3.  You left out the possibility suggested by Joan: the debt limit is not raised and Obama decides to stiff retirees to pay debt service.

And apparently you've missed the news of the last few days that they're getting close to a deal.  Revenue neutral, 2.4 in cuts to Medicare, Social Security, and other little things in exchange for a smaller increase in the ceiling.

[Jacob]

2.  The Republicans haven't proposed any reductions to Social Security.  Obama has recently as part of his Grand Compromise.

So you figure the public will hold Obama and the Democrats responsible for the cuts in SS if it starts hurting them?

3.  You left out the possibility suggested by Joan: the debt limit is not raised and Obama decides to stiff retirees to pay debt service.

Okay. What are the repercussions of this?

And apparently you've missed the news of the last few days that they're getting close to a deal.  Revenue neutral, 2.4 in cuts to Medicare, Social Security, and other little things in exchange for a smaller increase in the ceiling.

No, I've seen it. I figure that goes under option 1, one way or another, but if you'd like to characterize it differently that's perfectly fair. What I'm interested in is hearing your thoughts on the outcome of such a deal.