As the public debt of the United States approaches the $14.3 trillion limit currently allowed by law, Congress is being pressed by the Obama administration to change the law and raise the limit. For months, Treasury Secretary Timothy Geithner has warned that failing to lift the debt ceiling would have "unthinkable" consequences. But many lawmakers are insisting that they will block the federal government from borrowing more money unless budget cuts and spending reforms are part of the deal.
Geithner told CBS last week that the results of failing to raise the debt ceiling would "shake the basic foundation of the entire global financial system." Other voices are singing from the same hymnal. "If Congress fails to raise the federal debt limit, the government will default, which all parties agree would have catastrophic effects on the economy," writes Joshua Green, a senior editor at The Atlantic. The Associated Press recently reported that if "borrowing slams up against the current debt limit ceiling of $14.3 trillion and Congress fails to raise it," the resulting "damage would ripple across the entire economy, eventually affecting nearly every American." When Democratic Senator Mark Warner of Virginia asked at a hearing in April what would happen "if we were to default and not raise that debt ceiling," Federal Reserve Chairman Ben Bernanke replied ominously: "It would be an extremely dangerous and very likely recovery-ending event."
Sounds scary. If the US government were to default on its debt, the fallout would indeed be calamitous. The full faith and credit of the United States would be undermined, foreign investors (who hold almost half of outstanding Treasury debt) would be spooked, interest rates could shoot up, and a stock market crash could set off a new financial panic.
But as anyone with a credit card or home-equity line of credit knows, reaching a borrowing limit and defaulting on debt are two very different things. Maxing out your credit card doesn't mean you're broke, it only means you can't borrow more money. So until you get a credit-limit increase or pay down some principal on your debt, you'll have to live on your take-home pay. But as long as you continue to make timely interest payments, your creditworthiness remains intact.