While affecting millions, a shutdown isn’t necessarily as worrisome to many as the shadow of uncertainty surrounding the government’s ability to pay its debts. The U.S. has almost never defaulted on its debt, only doing so during the War of 1812 and perhaps by accident in 1979.
“Failing to increase the debt limit would have catastrophic economic consequences,” the Treasury website notes. “It would cause the government to default on its legal obligations – an unprecedented event in American history.”
If there’s good news, it’s that the Federal Reserve’s Federal Open Market Committee transcripts from past debt-ceiling discussions suggest that debt would likely be prioritized. This means some programs would get funding while some won’t. Medicare and Social Security, in particular, could take a back seat. Prioritization of debt is a double edged sword.
“If there’s no deal,” vice chairman William Dudley said on an Aug. 1, 2011 call, “I’d think that how this would evolve would be that the Treasury would commit to pay principal and interest, and other payments would soon be delayed as the Treasury ran out of cash.”