Annie Lowrey imagines the worst-case scenario if the United States comes close to defaulting on its debt:
Foreign investors are spooked, and they're dumping Treasury bonds—billions of dollars' worth. They had been selling them off for weeks, of course, possessing much less stomach for the idiocy of the U.S. political system than you and your fellow Americans. But now, investors in Asia and Europe are practically using tractors and pitchforks to move the bonds onto the markets. You and your fellow principals meet: Will the bond market finally force Congress to act? Will this sell-off prove temporary? Should you buy what everyone else is terrified of? Should you all be worrying about hunkering down and battening the hatches and hoarding cigarettes for the barter economy? [...]
Within 72 hours, Congress has a deal on President Obama's desk, raising the ceiling to $16 trillion in exchange for balanced budgets to take effect in fiscal-year 2015 and some serious cuts now. Treasury starts issuing new bonds and making all payments on existing ones. But the market panic requires the Federal Reserve to reboot its emergency programs, disrupts the housing market, permanently raises the United States' borrowing costs, reshapes the world bond market, and shaves more than a percentage point off GDP growth—enough to throw the economy back into recession. Globally, investors no longer consider the dollar the reserve currency of choice.
It's important to note that the government won't automatically default or shut down if we reach the debt ceiling; the Treasury is capable of funding the government through means other than borrowing, at least for a short while. But we would be facing a situation where the market no longer has confidence in our political system's ability to deal with our short- or long-term fiscal problems, and that, more than anything, is what makes this a dangerous game.
