In A Nutshell: The Debt Ceiling Debate

Republicans and Democrats are in a stalemate over raising the U.S. Government's debt ceiling, with dire forecasts emerging daily of what will happen if no action is taken.

Among rating agencies, Moody's has said it would downgrade U.S. bonds if the government defaults, even for a day.

What's it all mean for consumers? Below is the debt ceiling debate, in a nutshell:

What is the Debt Ceiling?

It's the statutory limit on the amount of U.S. Government indebtedness. Congress periodically raises it so that the Treasury Department can pay maturing bonds and sell new bonds, which is how the U.S. Government borrows money.

How much is the current debt ceiling?

$14.3 trillion

What happens if it doesn't get raised?

No one really knows. The U.S. Government will still have lots of money, but not all it needs to pay for everything in the budget. It will be up to the Treasury Department to decide what bills to pay. Speaking to CBS News, President Obama said he couldn't guarantee Social Security checks would go out on schedule, for example, although for political reasons they probably would. There is also concern that the U.S. would “default” on its debt, meaning it wouldn't pay back bondholders.

What happens if the U.S. defaults?

Again, it's an unknown because it's never happened before. The biggest likely impact would be chaos in the financial markets, much like we experienced in 2008 with the Lehman Brothers bankruptcy. Since U.S. bonds would be looked upon as carrying more risk, the Treasury Department would probably have to pay much higher interest to get investors to buy them. That would cause all kinds of interest rates to go up and would likely push a weak economy into another recession. Ironically, it would also greatly increase government debt, since we would be paying out more in interest payments.

Why is there such a fight over raising the debt ceiling?

The government's rising debt was a major issue in the 2010 elections that gave Republicans control of the House of Representatives. Many of the new members feel they were elected because they promised to get government spending under control and to not raise taxes. Republicans have agreed to raise the debt ceiling only if large spending cuts are tied to the vote and no taxes are raised. Democrats have agreed to some spending cuts but say some taxes must be increased as well. Politically, neither party seems to feel it has much wiggle room.

When does the issue have to be resolved?

The government needs the expanded borrowing authority on August 2. Since Congress is scheduled to be in recess by them, President Obama is pressing for action by next week.