From Professor Krugman: How Bad Will It Be If We Hit The Debt Ceiling?
[I]t looks fairly likely that by October or so there will come a day when the U.S. government stops paying some of its bills, including interest on debt.CR Note: My guess is the U.S. government will pay their bills, but you never know. (For more, see Goldman on the "Debt Limit").
How bad will that be? The truth is that we don’t know ...
Suppose that everyone expected normal payments to resume, with back interest, in a couple of weeks. In that case, even a slight discount on, say, Treasury bills would make them a very good investment — so speculators would basically step in and support the value of U.S. debt despite temporary default. In that case default might not be that big a deal.
The big problem would come if investors see the default as more than a temporary glitch — if they see it as a sign of enduring, critical dysfunction in American governance. In that case they wouldn’t necessarily step in to buy our debt, and their confidence in the whole economic edifice would take a severe hit.
• At 8:30 AM ET, The Consumer Price Index for July from the BLS. The consensus is for a 0.2% increase in CPI, and a 0.2% increase in core CPI.