The debt ceiling, enacted to limit Treasury's borrowing authority as well as to put to rest questions regarding the government's ability to borrow in the first place, has been raised many many times, but lowered only seldom (once after WWII, twice more during JFK's administration). That alone is a symptom of something wrong.
Both political parties have raised the debt ceiling. The donks have raised it more. A lot more.
The most recent debt limit increase was a stupefying $1,900 billion, shortly after passage of Obamacare. Passed by an unopposed Congress, it was more than double any previously mind-boggling increase. Yet even that mind-boggling amount wasn't enough... now they're looking for more.
If the debt ceiling is reached, options exist for continuing to run the government but none of them are good.
• Federal employee retirement funds can be raided:
... but if that's done it doesn't take a stretch of the imagination to envision similar legislation that would seek to raid private employee retirement funds as well.
• The Treasury can direct the Fed to "coin money" but that's been already been done with reckless abandon recently, diminishing the purchasing power of one's earnings (effectively, a stealth tax).
• Some argue the debt limit is unconstitutional and the President can simply ignore it, given the 14th Amendment's wording ("The validity of the public debt of the United States ... shall not be questioned") but little Timmy Geithner has unequivocally denied that interpretation. I feel better already
• Some think "Millionaires and Billionaires™" can make up the difference. Even those with a public school education can determine they can't.
That leaves Congress with two choices: benefit reductions or tax increases. There are problems with both.
Many benefit programs are just as statutory as the debt limit, and there are more of them now than ever. Thanks to federal takeover of the formerly private mortgage loan guarantors, those obligations must be paid. Obligations due to Federal assumption of obligations owed by formerly private banks (AIG et al) also must be paid. Medicare, Medicaid, Soc Sec, all those must be paid. Absent legislation modifying those programs, there's no way out of them.
As for tax obligations, there's simply no way to extract enough money from "the rest of us" that is, the middle class - who collectively earn the bulk of all aggregate income in the United States - to make a significant difference in the debt. The less-than middle class pays no taxes so forget that.
So what's going to happen? What should happen?
There's no question in my mind what's going to happen. The US will default. No, not next month, not next year, maybe not even in ten years, but thanks to out of control spending by Congress and woefully ill-advised takeovers of failed businesses and banks, default and collapse can no longer be avoided. It will happen... eventually.
As for the immediate future, the debt ceiling will be raised. There is no doubt. It will be increased enough to run the government past the 2012 elections, passing the problem on to the next Administration. In exchange the Ds will agree to meaningless spending cuts to take place well into that next Administration, saddling it with a discontented public wondering where its Social Security checks have gone and why they can't find any doctors who will accept Medicare any more. In the meantime, both sides will declare victory and go home for their August recess. Taxes will increase, though such increases will manifest themselves in "closing loopholes" such as the mortgage interest deduction, AMT, etc. Tax the rich, and guess what... you're rich!
What should happen? The House should require repeal of the largest tax increase in history - the one responsible for the nearly two trillion dollar increase the last time the debt was addressed. This requirement should be a condition of raising the debt ceiling. This will allow private enterprise to grow without the specter of certainly rising, yet unpredictable employment costs.
If there is anything good to come out of this, is that Obama is losing support on all fronts. He asked for it. If not for his signature plan - health care's "final solution" - things may have been different. Such are the consequences of failure.