The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void. US Constitution, Amendment 14 Section 4The President is doing his best to frighten Americans and our creditors by claiming if the GOP does not capitulate to his demands and "cleanly" raise the debt ceiling we will default on our debt, damaging forever the full faith and credit of the United States. Simply put, that is a lie!
In fact we are already over the debt limit and the sky hasn't fallen. The present debt limit is $16.999 trillion. According to Treasury Direct, the Dept. of Treasury's website the US has already surpassed the debt limit by over $47 trillion.
If the October 17th deadline is passed without an increase in the debt ceiling it simply means the government can't borrow money and has to "live" on the tax revenue it takes in each month (about $250 billion). Interest on the federal debt runs about $20 billion each month leaving money left to run parts of the government.
Forbes' Jeffery Dorman describes one way for the remaining dollars to be spent
The federal government estimates it will collect almost $3 trillion in revenue for the fiscal year that runs from October 1, 2013 until September 30, 2014. Below I demonstrate one possible way the federal government could institute some priorities and spend only the amount it receives in revenue.If the debt ceiling deadline is missed the federal government will have to prioritize spending. And despite the scary verbiage, there will not be a default unless Obama himself decides to ignore the constitutional direction that interest on our debt comes first.
To begin with, the interest on the national debt must be paid. I will budget $240 billion for that. The White House is guessing a little lower, but interest rates have been rising, so I will play it safe. Next, social security payments should run about $860 billion. Place that as the second priority and we already have spent $1.1 trillion of the $3 trillion we have.
Holding Medicare spending to about its fiscal year 2013 total and making some small cuts to Medicaid and other health spending would keep health care spending by the government to $860 billion. This does not include additional spending for the Affordable Care Act, but we need to prioritize and I am making it a lower priority than the health spending we have already been incurring. Also, there is no need for extra spending for the Affordable Care Act before January 1 since the coverage does not start until then. So as long as the debt ceiling is raised before then, there is no problem.
Veteran’s benefits will cost another $140 billion if we leave it unchanged. Department of Justice programs and general government functions add another $83 billion if their spending levels are held roughly constant. We can save some money by cutting science funding to $10 billion and international affairs spending to $13 billion which is enough to operate the State Department and embassies, but not pay foreign aid. This takes total spending to $2.2 trillion.
Obviously nobody believes deficit spending should be brought down to zero immediately that would be irresponsible and will eventually damage the economy. On the same hand if the debt assuming that a debt ceiling freeze is not a permanent fix and lasts just a short while, the government can operate and our debt can be serviced without a blow to the US economy.
The damage will come when, just as he did with the sequester and the shutdown, Obama acts like a spoiled angry child and prioritizes government spending in a way that will cause the most "hurt" to the American people.
UPDATE Moody's Agrees
” We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact,” the memo says. “The debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt. There is no direct connection between the debt limit (actually the exhaustion of the Treasury’s extraordinary measures to raise funds) and a default.