Debt Ceiling: What US Government Default Would Mean For You

July 12, 2011 -- In almost any other year, Aug. 2 would be just another midsummer day. But, as most Americans have probably heard by now, this Aug. 2 is the deadline for Congress to raise the nation's $14.29 trillion debt ceiling to prevent the U.S. government from defaulting on its obligations.

But what does that really mean? What's likely to happen next month if Washington lawmakers, who've made little headway toward a deal, fail to strike an agreement to raise the debt limit?

The Obama administration says it would mean financial apocalypse.

"The credit-rating agencies around the world have said if Congress doesn't act by the 2nd, they will downgrade our credit [for] the first time in history," Treasury Secretary Tim Geithner said Sunday on NBC's "Meet the Press." "And if that happens, you're going to see catastrophic damage across the American economy and across the global economy."

Republicans, on the other hand, say that's a bunch of nonsense. With the fight for the GOP presidential nomination heating up, some of the top candidates have urged their colleagues on Capitol Hill not to raise the debt limit, despite the administration's dire warnings.

"I will not vote to increase the debt ceiling," Rep. Michele Bachmann, R-Minn., vowed in a television ad last week, a stance echoed by fellow presidential candidates Tim Pawlenty, the former Minnesota governor, and Rep. Ron Paul, R-Texas.

So who should Americans believe? Could Aug. 2 be the beginning of an economic apocalypse or can it be ignored in an effort to combat the country's soaring deficits?

JD Foster, an economist at the right-leaning Heritage Foundation, said a failure to raise the debt limit by Aug. 2 would result in consequences for the government, but that talk of financial Armageddon is overblown. If the debt limit is not raised come Aug. 2, the government will have to pay its bills solely using incoming cash flows.

"What we know at that point is we don't have the borrowing capacity or the revenues to make payments on all the bills and promises that Congress has legislated and the president has signed, so we'd be short on cash," Foster said.

"As Geithner put it, we would then be in default on our obligations. That's an important expression because when Congress passes a law that the president signs, saying you're going to spend something, you have a legal obligation to make good on that spending promise. It doesn't mean, however, that on Aug. 2 we will default on our publicly held debt. That's a different issue."

In other words, if the debt limit is not raised, the U.S. government would no longer have the cash to cover its expenses. That could mean no Social Security payments, no benefits for veterans, no pay for members of the military and other government workers, or the shutdown of federal programs. It could also mean not paying bondholders, but that would be an unprecedented default, a scenario seen as highly unlikely.