The U.S. Treasury has almost run out of borrowing power under the current debt ceiling. This means that as of Aug. 2 the Treasury will be unable to issue new debt for the purpose of paying off prior debt. If payments are not made on outstanding Treasury bonds that will be a default, the first in U.S. history.
A default would be ruinous. The U.S. credit rating would sink, interest rates on U.S. debt would rise, commercial rates tied to Treasury rates would rise, financial institutions that have insured U.S.-backed securities by means of credit default swaps and other derivatives would take big hits (think of AIG and Lehman Brothers) and the already weak economy would become weaker.
That is the nightmare scenario, the one the Republicans in Congress are threatening to bring about. They say they will not vote to increase the debt ceiling unless the Democrats agree to reduce the budget deficit by means of massive spending cuts, cuts that would be especially hurtful to people at the lower and middle income levels.
The Republicans absolutely refuse to consider any tax increases in addressing the budget deficit. They insist on doing it all through spending cuts and if they don't get their way they say they won't vote to increase the debt ceiling.
This is an unreasonable position designed mainly to save wealthy people from paying any more taxes. The Republican party today stands mainly for two principles - deregulate and de-tax. They especially want the deregulation and tax reduction for the wealthy.
We should remember that it was Republican deregulation that let the mortgage lenders and investment banks run wild and drag us into the economic mess we're still in. Many wealthy people, however, made fortunes among these ruins.
In trying to justify their intransigence on the debt ceiling issue the Republicans day if it isn't raised we won't default on our debts, we will just have to pay them without new borrowing. In practice this will likely mean a suspension of Social Security and Medicare payments.
Not only will that hurt a lot of people but the bond markets will treat it like a default and future interest rates paid by the government and everyone else will rise.
The Republicans are playing a very dangerous game in their efforts to protect the wealthy from paying any more taxes.