Treasury Secretary Lew informed Congress today that the Obama Administration is now using the final set of extraordinary measures to fund the government pending an increase in the debt limit. Wall Street seems unconcerned about a default, apparently accepting the Republican leadership's assurances that a default will not occur.
If the United States were unable to borrow, the likely action would be stop redeeming Treasury bonds that come due. The doomsday scenario should this happen is that major holders of US debt like China, Japan and Middle East countries would start selling off their bond holdings driving the value down and interest rates into hyperinflation territory. However, if the Federal Reserve were to step up and buy all available bonds this wouldn't be a problem. Since that's basically what they've been doing for several years already with QEs 1 through 3, this probably explains the total lack of panic on Wall Street.
In theory the government could also go to the Federal Reserve for needed cash by creating some sort of warrant system for paying major contractors that would then use these warrants as collateral to borrow from the Fed banks at zero interest. The idea of the platinum coin was rejected by Obama the last time the Tea Baggers broke loose from their restraints and began terrorizing the village, but there is no reason it couldn't be issued this time.
The Republicans could take Obama to Court for any scheme like this to maintain the Full Faith and Credit of the United States of America as all government officials are required to do by the 14th Amendment. How the Supreme Court would rule is anybody's guess, but they would probably side with the government rather than the Tea Party. If they didn't, would Obama go all Andrew Jackson on them, and tell them to take a hike?
Conservatives have created the fiction that the 'debt ceiling' has always existed because Congress has long been in the habit of approving bond issues. In fact the United States has always been running up debts, as opposed to issuing bonds that are an interest bearing device created for rich people to invest in. It was the idea of actually paying interest over a fixed maturity that needed Congressional approval, not borrowing money.
The resolution of all of this depends on how many people you can get to agree on what will happen next. You have the crazy people on the right that think the only gold coins should be used. By the way, gold dropped 3% today. You've got bankers that think that they are entitled to a slice of everything, even though they don't actually do anything. Then you have people like Sen Elizabeth Warren that think that we've had quite enough of this already.
Twitter @BruceEnberg - keeping the village informed about the goings on at the castle