After the Debt-Ceiling Breach: What Day 1 in Default America Might Look Like

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The consequences of default are so awful, it's impossible to imagine Washington not raising the debt limit by March. And yet, here we are again, waiting and debating the un-debatable.

600 debt ceiling signs REUTERS Kevin Lamarque.jpg

Reuters

On December 31, the United States hit the debt ceiling. What, you didn't feel it? Well, no, you didn't, and neither did I. For that, we can thank "extraordinary measures," the extraordinarily vague term Washington uses to describe the various way the Treasury department can move around money to keep us from straight-up defaulting on our promised payments. But extraordinary only lasts so long. These measures buy us about six weeks -- basically until Valentine's Day. After six weeks, the United States government will be living hand to mouth on cash and daily revenue, and it's hours or days before ... DEFAULT.

What happens then? The only honest answer is: Nobody has any idea. It is the moment the Bipartisan Policy Center calls the X Date: The first day the U.S. government doesn't have the money it needs to pay all of its bills. The United States has never hit the X Date. Hopefully, we never will. But here's what we know about what would happen on day one in Default America.

On a typical day in late February 2013, the government can expect to take in about $9 billion and spend about $15 billion. In Default America, however, we wouldn't have the authority to spend that extra $6 billion. So those payments would simply go unpaid. Somebody in Washington would have to decide who gets the money they were promised and who doesn't. Every day. As long as the debt ceiling isn't raised. Basically, we'd default on 40 percent of our obligations, over and over again.

What would we pay and not pay? We'd have to make a list. (And that assumes the government's computers can even process this sort of prioritization, which is unprecedented.) At the very top might be interest on our debt to keep buyers trusting in the full faith and credit of the U.S. Then maybe Medicare, Medicaid, Social Security, and tax benefits. That means we wouldn't have enough money for ... basically anything else. Here's an illustrative example from BPC:

Screen Shot 2013-01-08 at 2.26.01 PM.png

Screen Shot 2013-01-08 at 2.26.08 PM.png

The consequences of an immediate 40 percent cut to government services would be dire. Practically all federal employees would suddenly see their paychecks go to zero. Some days, the government would get enough money to pay Social Security checks and Medicaid providers. Other days it wouldn't. Our defense budget would collapse. It would be pandemonium.

Everything else is informed speculation, but you don't need a creative mind to guess that a stock market that loathes surprises would positively freak at the first-ever default of the United States government. Trouble on Wall Street would trickle down to rates that affect every participant in the economy.  "A spike in the Treasury rate would mean a spike in credit card rates and mortgage rates, not to mention all manner of more esoteric financial derivatives," Ezra Klein explains. And yet, we don't even know that Treasury interest rates would even spike. A global stock market collapse might, weirdly, raise demand for U.S. debt, a classic safe-haven, which might still be seen as more reliable than equities in a Default-America World.

Predictions are hard. Especially about the future. And especially about a future after the United States blows through the debt ceiling. That's precisely why, for all the posturing and pyrotechnics in Washington, there's no conceivable way that the U.S. doesn't make a deal to raise the debt limit by mid-February.

And yet...

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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