What the Government Debt Crisis Means to You

By SARA MURRAY

"Nobody knows."
That's the short answer experts provide when asked what will happen if the nation doesn't raise the U.S. government's $14.29 trillion borrowing limit by Tuesday. Without raising the limit, the federal government may have to stop or delay payments such as Social Security checks, Medicare benefits and military salaries. It's unprecedented in the nation's history.

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"This would cause investors here and around the world to doubt, for the first time, whether the United States will meet its commitments," according to the Treasury Department. "That would precipitate a self-inflicted financial crisis potentially more severe than the one from which we are now recovering."
As the weekend began, both parties remained on separate tracks. House Republicans passed Speaker John Boehner's debt plan Friday night, but it is expected to fail in the Democratic-controlled Senate. Senate leaders, meanwhile, said they'd hold a procedural vote on their own debt plan today.
President Barack Obama continued to push for a bipartisan solution, noting that the two parties' plans weren't miles apart. "So there are plenty of ways out of this mess," Mr. Obama said, "but we are almost out of time."
Markets grew more anxious over the government stalemate. The Dow Jones Industrial Average dropped 4.2% for the week. Oil prices fell; gold prices jumped. Bond prices rose as the gloomier economic outlook overwhelmed angst about default. But short-term money markets where banks do business with each other showed signs of strain.
As most Americans ended the workweek, it was still unclear how the government would get through the debt debacle.
Here are answers to questions you may have about what happens if Congress doesn't raise the debt ceiling:
Q: How is this different from a government shutdown?
A: The threat of a short-term government shutdown earlier this year came with consequences that were far less severe. In that case, the federal government had the money on hand to pay its bills, but it didn't have the Congressional authority to spend it. The government announced ahead of time that current Social Security beneficiaries would receive their checks and employees learned whether they'd be furloughed.
That's not the case this time. The federal government has the authority to spend its money, but it won't have enough incoming revenue to cover roughly 40% to 45% of its bills. And it hasn't announced which bills it will pay and which it won't.
Q: When will the federal government stop paying all of its bills?
A: The nation officially hit the debt ceiling in May. And ever since, the Treasury has been using stopgap measures to keep paying its bills. The Treasury says Tuesday is the last day it can ensure the nation will pay all of its bills. Some have suggested that the government might have enough cash for a bit longer. Barclays Capital analysts estimated the Treasury could pay the bills until Aug. 10.
Q: Will I get my Social Security check?
A: It depends on how the Treasury prioritizes its spending. The government will have $306.7 billion worth of bills to pay between Aug 3. and Aug. 31 and is expected to bring in just $172.4 billion in revenue, according to an analysis by the Bipartisan Policy Center. Some or all of the bills could go unpaid.
A big test will come Wednesday, when $23 billion in Social Security payments are to go out.
Q: Will the U.S. government pay bondholders?
A: Most experts agree that even if the debt ceiling isn't raised, the Treasury will find a way to make its $29 billion interest payment due Aug. 15. But the government will have to prioritize it over other payments, such as unemployment benefits, payments to Medicaid providers or defense spending.
Q: Will my tuition assistance come through on time?
A: August is one of the highest months for Pell Grant payments, and an estimated $10.4 billion is scheduled to be shelled out next month. August isn't actually the biggest month for tuition assistance disbursements. Most schools haven't begun their fall sessions yet, so September's tuition payments tend to be larger.
Q: What about federal services funneled through state governments?
A: Some federal funding -- payments for roads, schools and Medicaid -- flows through state governments. State officials will have to decide: "Do you want to fill in anything that you don't receive from the federal government?" says Michael Bird, senior federal affairs counsel at the National Conference of State Legislatures.
States could choose to suspend programs temporarily or, if they have enough cash on hand, cover the federal government's share in the short term.
Q: I'm not relying on programs like Social Security, unemployment benefits or food stamps. How might this affect me?
A: A roughly 40% reduction in government spending would be a massive shock to the economy. It's equivalent to about 10% of gross domestic product, says Nariman Behravesh, an economist for IHS Global Insight.
Failure to extend the debt ceiling for about a month would shave 0.6 percentage point from growth in the second half of the year and push the unemployment rate up to 9.6% by the end of 2011, compared to 9.2%, according to consultancy Macroeconomic Advisers.
The situation grows more dire if the government is unable to pay bondholders, which many experts view as unlikely. "This could be another Lehman moment," Mr. Behravesh says, comparing it to the collapse of Lehman Brothers in 2008, which rocked the financial system.
If financial markets react by pushing up interest rates to compensate for all the added risk and uncertainty, it will become more expensive for everyone to borrow -- consumers, businesses and the government. The Congressional Budget Office estimated that a one-percentage-point rise in interest rates would add $1.3 trillion to the nation's deficit over a decade.