With Congress moving like molasses and time running out, more and more Americans are wondering what happens when we hit the debt ceiling.
The short answer is that it would be bad – as in catastrophically, you've-never-seen-anything-like-this-in-your-life bad.
"[It] would be like the financial market equivalent of that Hieronymus Bosch painting of hell," Michael Feroli, chief economist at JP Morgan, told the Washington Post.
Yet many on Wall Street are convinced that even the dunderheads in Washington are not stupid enough to allow the United States to default on its debt.
That's why the markets, while a bit shaky, so far have not plummeted.
As of yesterday (Thursday), President Barack Obama was in the midst of a series of meetings with members of Congress with the idea of forging a deal that would extend the U.S. debt ceiling for about six weeks while negotiations on other budget matters continued.
News of the talks sent stocks soaring, with the Dow Jones Industrial Average ending yesterday up more than 322 points.
But that deal just pushes the next debt ceiling crisis to Thanksgiving, a period when Washington historically doesn't get much done.
And any short-term deal wouldn't guarantee a more lasting solution later over the issues that have caused the crisis – the funding of Obamacare, entitlement program reform, and the Republican goal of cutting spending in concert with raising the debt ceiling.
Because Congress has managed to conjure up last-minute deals in the past, as they did in the summer of 2011, Wall Street is confident they'll do it again this time.
But that confidence is misplaced.
You see, both the Tea Party Republicans driving this impasse and the Democrats see this as a fight they must win at all costs.
And both are convinced the grave threat of a U.S. default will force the other to surrender. In this high-stakes game of chicken, even a small miscalculation by either side could trigger the U.S. debt default that everyone fears.
"It would be insane to default, but it's no longer a zero-percent probability," Simon Johnson, a former chief economist of the International Monetary Fund, told Bloomberg.
That's why it's vital to know ahead of time what will happen when we hit the debt ceiling, be it next week, in six weeks, or however long they manage to kick this can down the road…
What Happens When We Hit the Debt Ceiling
People are worried now about what happens when we hit the debt ceiling, but the fact is we already did – on May 19.
The Treasury Department has used "extraordinary measures" since then to keep paying the nation's bills, but the bag of tricks will be exhausted Oct. 17.
That's when Treasury Secretary Jack Lew has estimated the government will be down to about $30 billion in cash.
On average the federal government spends about $10 billion a day while continuing to take in revenue, mostly through taxes. But that revenue is only enough to cover 68% of the government's bills – the rest must be borrowed. That's why Congress needs to raise the U.S. debt ceiling.
Without the ability to borrow more money, some bills will go unpaid. That list of people the government must pay includes contractors, Social Security recipients, soldiers, and, most crucially, those who hold U.S. debt.
That matters because if the U.S. fails to make interest payments on any of its debt (mostly Treasuries), it will be in default for the first time in its history.
"People have typically turned to Treasuries as a safe haven, but what will happen when they realize it's not safe anymore," Jim Grant, founder of Grant's Interest Rate Observer, told Bloomberg. "Financial markets are all confidence-based. If that confidence is shaken, you have disaster."
Things would get very ugly very quickly – take a look: