When we do hit the limit, and we don't raise it, this is what happens. Let me put it in some familiar context: Do you remember the 2008 crash? The whole thing about the derivative debt fiasco, fraudulent credit ratings, write-downs forcing some of the world's biggest banks to declare bankruptcy overnight, forcing even Republicans to support TARP and multi-billion dollar bailouts, etc? And how it brought the stock markets crashing down, killed retirement accounts, yadayadayada? Let's have a quick refresher course.Even a downgrade of AAA to AA could have catastrophic global consequences. Surely you've read about how Greece and Spain's debts are killing Eurozone banks and other EU governments who own portions of that debt? Global holdings of US debt is like that times a thousand.
Housing bubble leads to lots of mortgages, given to people with questionable resources, but seem affordable because rising housing prices artificially inflates the equity value and keeps a variable interest rate low. Wall Street discovers that if they bundle mortgages together, then chop them up into chunks again, they can trick credit agencies into rating them AAA while claiming absurd rates of return. Wall Street gobbles up mortgages and sells them off as collateralized debt obligation vehicles (CDO) to any pension fund manager, mutual fund, institutional investor, and other bank who'll throw money at at. It's all AAA debt. Housing bubble bursts. Home prices crash. Bad mortgages have their interest rates increased. Homeowners default on payments. CDO revenue stream starts drying up. Panic. Credit agencies forced to reassess CDOs at lower ratings. Triggers reserve clauses at banks, who now A) need to have more cash on hand to balance the bad debt and B) need to write off the loss of market value. Banks start to go bankrupt. CDO values nosedive. Anbody holding a CDO is now sitting on a pile of steaming shit and doesn't know what's inside. Mutual funds drop 45%. State and institutional pensions experience catastrophic loss. Stock market crash. Banks disappear. Investment vehicles underwritten by those banks disappear. Global fucking meltdown. Etc.
Ok, so this happened because CDO/CMOs, a relatively modern invention, had a sudden credit-worthiness shock, which set off the domino chain.
Now imagine how many investors worldwide, how many banks and firms, pensions and IRAs, are holding US Treasury bills right now. Way more than were holding mortgage-based CDOs, right? And guess what happens to the AAAAAA++++++!!!!!111eleven credit rating of United States paper when we hit the debt ceiling and have to start missing interest payments and defaulting on government-issued debt.
Take a wild fucking guess.
Would a brief period of interest default necessarily cause 2008 Round 2? No. The chances are, however, nonzero, and any government official who even thinks about daring to risk the consequences should be immediately (forcibly?) removed from office.
This will impact foreign governments, foreign and domestic banks, mutual funds, variable insurance products, tank the bond markets, raise interest rates (making future debt even more expensive), everything. The stability of US government debt is a cornerstone of global finance.
