Consequences of not paying debts

Before being concerned about the debt ceiling, we should be able to answer two fairly simple questions: What is it? What happens if the government doesn’t raise it? Most people are probably as perplexed by these questions as I am.

To aid understanding, an analogy could be made to the situation of an ordinary person, I’ll call Sam, who has what most ordinary people have: an income, some property and debts. Sam just ordered some new furniture. Then he added up all of his debts and decided he just can’t incur another penny of debt beyond what he presently owes. He has set a debt ceiling for himself just like our government has for us.

Then Sam notifies the world that he won’t pay for anything unless he happens to have the cash in his pocket on the day that he buys it. Sam has decided not to raise his debt ceiling just as our government is considering.

Now, if you were the furniture dealer, would you deliver the furniture? Surely not. Anyone would be a fool to sell anything to Sam unless he paid them in cash. By destroying his credit, Sam has opted to live hand to mouth. This is what the tea party zealots are threatening to do to us if they don’t get their way.

But, say the zealots, the government has enough money coming in through taxes and fees to pay its bills. It can comfortably live hand to mouth. What happens, though, if cash is not there for some unexpected reason? Then, people, like our soldiers, don’t get paid. If the government only promises to pay with the cash it has on hand, nobody, not even the Chinese, would buy our bonds or sell us anything on credit.

But it will be worse than scratching by day to day, hoping enough people pay their taxes so we can pay our soldiers. Trillions of dollars sitting in money markets and bank deposits will suddenly become uninsured because FDIC insurance is a government obligation. Think about that, rich people, and get your running shoes on.