What happens if the debt limit is not raised by August 2?
- interest payments to bondholders would stop
- Social Security, Medicare, Medicaid and federal retirement benefits would cease
- federal civil and military salaries would stop, meaning everyone working for the US government would be temporarily laid off
- payments to federal contractors would stop
- unemployment benefits would stop
- student loans would be halted
There would be a run on mutual funds which would lead to a stock market plummet. All markets would freeze up as everyone tries to conserve cash. It would be a repeat of the Sept. 2008 liquidity freeze, and it would push the economy back into a double-dip.
Even a temporary technical default would lead to a 0.5% increase in interest rates, costing tens of billions a year in additional interest.
I can see both sides on this issue. Yes, the Democrats spend way too much and they are very arrogant, refusing even to have a Plan B or to contemplate the possibility of default. The Tea Party Republicans want too many short term cuts at a time when the economy is fragile.
But I side with the Republicans on this one to a point. The Democrats need to show some humility and identify trillions of cuts that will be made. There is no "right" to a federal job or Social Security or anything else that comes from the government. We will have to address the issue of out-of-control spending and borrowing sometime and we might as well do it now instead of kicking the can down the road a couple of years and prolonging the agony.
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