So if the US really hits the debt ceiling, then what?

What would really happen if the US government hit the debt ceiling? We ask that question because there’s a lot of discussion in Washington about debt ceiling politics – who’s got leverage, who’s bluffing, who isn’t, and so forth – but much less talk about what the debt ceiling actually is.

And the phrase “debt ceiling” sounds final in an ominous sort of way. If Uncle Sam reaches this limit in late February, as now seems likely, would the federal government grind to a halt for want of cash?

Not entirely. Hitting the debt ceiling is not the same thing as shutting down the government by failure to appropriate funds. In that sense it would be a fiscal crisis wholly different from the Bill Clinton-Newt Gingrich budget fights of the mid-1990s.

In fact, it would be so different nobody actually knows what it would be like. It would be uncharted territory, tabula rasa, beyond the horizon there be dragons.

Some conservative fiscal experts say it wouldn’t be so bad – the US could shuffle through its bills, pay off the important ones, and muddle through like a home-builder with a cash-flow problem.

But many economists worry it would be a disaster. Financial markets – unstable as an emotional teen in the best of times – could judge that the US is defaulting on its debt, and swoon accordingly.

“This could result in significant economic and financial consequences that may have a lasting impact on federal programs and the federal government’s ability to borrow in the future,” concludes a Jan. 4, 2013, Congressional Research Service debt limit report.

The heart of the debt limit problem is that the US government spends more money than it receives in tax revenue. (Yes, we know you’re shocked about that.) The Treasury Department covers the difference by borrowing cash.

Back in the dawn of the Republic, Congress used to vote to approve each new debt issue. That became tiresome, and by 1939 lawmakers had established a debt limit up to which Treasury could borrow without asking permission of Capitol Hill.

Today the debt limit is analogous to a limit on Treasury’s credit card. But unlike your credit card (hopefully) this involves debt the US is not paying off. Continued deficits mean Washington has to borrow more and more money. Accordingly, it keeps nearing its debt limit. Congress has voted to raise the debt limit 13 times since 2001.

Currently the debt limit stands at $16.4 trillion. Treasury officials say they’ve already borrowed that much money and they’re making ends meet at the moment through so-called “extraordinary measures.” (No, we don’t know what those are. But we’re pretty sure they don’t put “Social Security Trust Fund” and “Powerball” in the same sentence.)

Sometime in late February or early March the League of Extraordinary Measures will have exhausted its possibilities and the US will really wham up hard against the debt ceiling, says the Treasury. What then?

What happens then is that the government will still wake up and go to work the next day. But Treasury officials won’t be happy. They will have too many bills, and not enough cash to pay them. Right now the US borrows 40 cents out of every dollar it spends. You can get behind pretty quickly facing that sort of budget math.

The US would not have enough money to fund everything from soldier salaries to Social Security benefits and interest on the national debt. Altogether Treasury makes some 80 million payments per month. That’s a lot of “past due” to ring up in a short period of time.

It is debt payments that economists worry about the most. The US has long been the bluest of blue chip debtors. Most everyone around the world does not question America’s commitment to repay its commitments. That’s why interest rates on Treasury bills remain so low.

But what if the US does renege on its bond payments, even temporarily? Would T-bill rates skyrocket, costing billions in extra interest? Would the stock market collapse like a distraught twenty-something whose significant other just left them? Nobody knows. That’s where the dragons may lie. (See above.) Or maybe not.

“It is difficult to perceive all the adverse effects that a government default for even a short time would have on the economy and the public welfare,” concluded a 1979 GAO study on the effects of hitting the debt limit.

Some conservatives say the US could mitigate any financial market effects by prioritizing its bill paying. Put debt payments first and the US would still have enough tax revenue coming in to pay them. No harm, no market foul, right?

Republicans have even discussed legislation that would require the US to set priorities in this manner.

“The only way the federal government would default on its debt in the event the debt ceiling remains unchanged is for the Treasury to choose to default – an utterly implausible eventuality,” writes Heritage Foundation senior economics fellow J.D. Foster.

Other economists assert that the markets are the markets, and it is difficult to predict how they would react even if bondholders got first call on US tax dollars. They might still be spooked by the unprecedented nature of the debt ceiling crisis, pushing up interest rates anyway.

Plus, the Treasury Department believes that it does not have the legal authority to set priorities. Doing so is impractical, as well, say officials. Eighty million bills a month is a lot to sift through and rate for importance.

According to a letter from the Council of Inspectors General on Financial Oversight sent to Sen. Orrin Hatch (R) of Utah in 2011, Treasury officials have considered a range of responses to hitting the debt ceiling. Among these were asset sales (“Who will bid on this fine Air Force base?”), across-the-board payment reductions, payment prioritization, and various kinds of payment delays.

“Treasury reached the same conclusion that other administrations had reached about these options – none of them could reasonably protect the full faith and credit of the U.S., the American economy, or individual taxpayers from very serious harm,” wrote the Inspectors General. “However, Treasury officials told us that organizationally they viewed the option of delaying payments as the least harmful among the options under review.”

So that’s how things stand. If the US reaches the debt limit, Treasury will take all of Monday’s bills and put them in a box. When enough tax revenue has accumulated to pay them – say on Wednesday – they will.

But in the meantime, of course, two more days would have gone by. And the US would just get further and further behind, fiscally speaking. So Treasury officials would beat on, boats against the current, borne back ceaselessly into the debts of the past.