Yesterday, Reuters.com posted an article by James Pethokoukis about exactly what happens if the debt ceiling is not raised. The article included this chart:
The chart illustrates a number of things. Note how much more the government is spending than what it actually takes in. Note also that interest is a major part of government’s monthly expenses. One simple way to lower monthly expenses is to bite the bullet–cut overall spending and begin to pay down the debt in order to decrease interest payments.
The article answers a number of questions about what will happen if the debt ceiling is not raised. Here are two of them:
Q: What happens on August 3 if the debt limit is not increased?
A: … Using August 2010 spending and receipts as a proxy, the Treasury will probably take in $5-$10 bn in revenue on August 3, leaving insufficient revenues to make Social Security payments partly unfunded even if all other spending is deferred. Since the Treasury has carried a minimum cash balance of about $20 bn since 2009, and currently carries a balance of $74 bn, Social Security payments might still be made by drawing down the Treasury’s cash balance.
Q: Are Treasury interest payments at risk?
A: We do not think so. … There are two basic reasons that interest payments should not be called into question: First, if the August 2 deadline is missed, it is very difficult to see the debate dragging to August 15, when interest payments are made, since we doubt there will much congressional appetite for a protracted lapse in borrowing authority. … Second, the Treasury is likely to prioritize payments. While the sharp fiscal contraction that would result from prioritization would have negative short-term economic consequences and would be difficult to implement, it nevertheless seems likely if necessary.
Please follow the link to the article. The article is one of the clearest explanations of what will happen if an agreement is not reached that I have seen.