In the meantime, the hostage strategy will continue to play out — Republicans are threatening to create a recession, on purpose, unless Democrats give them a whole lot of unspecified spending cuts. If Dems fail to comply with the demands, the GOP will refuse to act and on August 2, we’ll reach the next phase.
And then what happens? Paul Krugman explains that Americans can expect “seriously bad consequences.”
For if we hit the debt ceiling, the government will be forced to stop paying roughly a third of its bills, because that’s the share of spending currently financed by borrowing. So will it stop sending out Social Security checks? Will it stop paying doctors and hospitals that treat Medicare patients? Will it stop paying the contractors supplying fuel and munitions to our military? Or will it stop paying interest on the debt?
Don’t say “none of the above.” As I’ve written before, the federal government is basically an insurance company with an army, so I’ve just described all the major components of federal spending. At least one, and probably several, of these components will face payment stoppages if federal borrowing is cut off.
And what would such payment stops do to the economy? Nothing good. Consumer spending would probably crash, as nervous seniors started wondering how to pay for rent and food. Businesses that depend on government purchases would slash payrolls and cancel investments.
Furthermore, markets might well panic, especially if interest payments are missed. And the consequences of undermining faith in U.S. debt might be especially severe because that debt plays a crucial role in many financial transactions.
I get that selling a complicated procedure with the word “debt” in it was going to be difficult when it came to the Republican base of Einsteins, but… but… but… I got nothing.