October 11, 2013 at 13:04 PM EDT
What Happens When We Hit The Debt Ceiling?
INDEXDJX:.DJI, INDEXSP:.INX, NYSEARCA:SPY, NYSEARCA:DIA, DJI:DJI, CBOE:SPX, NQ:COMP, NY:XAX Related posts: Debt Ceiling, Budget Showdown Won’t Derail Bull Market Debt Ceiling Debates Pushing Central Banks Toward Financial Independence What The Government Debt Ceiling Means To Your Investments A History Of The VIX During Recent Debt Ceiling and Sequestration Battles Gold and Debt Ceiling; Here We Go Again

debt ceilingDavid Zeiler: With Congress moving like molasses and time running out, more and more Americans are wondering what happens when we hit the debt ceiling.

The short answer is that it would be bad – as in catastrophically, you’ve-never-seen-anything-like-this-in-your-life bad.

“[It] would be like the financial market equivalent of that Hieronymus Bosch painting of hell,” Michael Feroli, chief economist at JP Morgan, told the Washington Post.

Yet many on Wall Street are convinced that even the dunderheads in Washington are not stupid enough to allow the United States to default on its debt.

That’s why the markets, while a bit shaky, so far have not plummeted.

As of yesterday (Thursday), President Barack Obama was in the midst of a series of meetings with members of Congress with the idea of forging a deal that would extend the U.S. debt ceiling for about six weeks while negotiations on other budget matters continued.

News of the talks sent stocks soaring, with the Dow Jones Industrial Average ending yesterday up more than 322 points.

But that deal just pushes the next debt ceiling crisis to Thanksgiving, a period when Washington historically doesn’t get much done.

And any short-term deal wouldn’t guarantee a more lasting solution later over the issues that have caused the crisis – the funding of Obamacare, entitlement program reform, and the Republican goal of cutting spending in concert with raising the debt ceiling.

Because Congress has managed to conjure up last-minute deals in the past, as they did in the summer of 2011, Wall Street is confident they’ll do it again this time.

But that confidence is misplaced.

You see, both the Tea Party Republicans driving this impasse and the Democrats see this as a fight they must win at all costs.

And both are convinced the grave threat of a U.S. default will force the other to surrender. In this high-stakes game of chicken, even a small miscalculation by either side could trigger the U.S. debt default that everyone fears.

“It would be insane to default, but it’s no longer a zero-percent probability,” Simon Johnson, a former chief economist of the International Monetary Fund, told Bloomberg.

That’s why it’s vital to know ahead of time what will happen when we hit the debt ceiling, be it next week, in six weeks, or however long they manage to kick this can down the road…

What Happens When We Hit the Debt Ceiling

People are worried now about what happens when we hit the debt ceiling, but the fact is we already did – on May 19.

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  5. Gold and Debt Ceiling; Here We Go Again

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