WASHINGTON -- Is the world's richest and most powerful country about to head into sudden financial default?
According to the U.S. Treasury and the White House, that is exactly what will happen unless feuding Democrats and Republicans in Congress overcome their differences by August 2, and agree on legislation to raise the amount of money the government can borrow, which currently stands at $14.3 trillion.
The United States is one of the few countries in the world that has a so-called "debt ceiling," which must be periodically raised by Congress to allow the government to borrow more money to fund already-approved expenditures.
Until now, it's been a fairly routine process. Legislators have adjusted the debt ceiling almost 80 times in the past 50 years -- 7 times alone under former President George W. Bush.
But a revolt by some opposition Republicans, who control the House of Representatives and are demanding deep spending cuts in exchange for raising the debt ceiling, has deadlocked Congress. The Senate, controlled by the Democrats, says it will kill any measures it views as extreme.
Chances Of Breaking The Impasse Have Worsened
On July 25, President Barack Obama, in a televised address, warned that failure to increase the U.S. borrowing limit would severely hurt the nation.
"Unfortunately, for the past several weeks, Republican House members have essentially said that the only way they'll vote to prevent America's first-ever default is if the rest of us agree to their deep, spending cuts-only approach," he said.
"If that happens, and we default, we would not have enough money to pay all of our bills -- bills that include monthly Social Security checks, veterans' benefits, and the government contracts we've signed with thousands of businesses. For the first time in history, our country's Triple-A credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet."
Republicans, led by House Speaker John Boehner, countered that it was in fact the Obama-led Democrats who were harming the country:
House Speaker John Boehner
"You know, I've always believed that the bigger the government, the smaller the people," Boehner said.
"And right now we've got a government so big and so expensive, it's sapping the drive out of our people and keeping our economy from running at full capacity.
"The solution to this crisis is not complicated. If you're spending more money than you're taking in, you need to spend less of it."
Chances of breaking the impasse worsened overnight after disagreements erupted within the Republican camp itself and Boehner failed to rally enough fellow party members to back his own bill.
Economists agree that if Washington wakes up on August 3 without a deal, the consequences could indeed be dramatic. The Obama administration would likely have to shut down many federal agencies and Social Security and medical benefits that millions of Americans rely on could be withheld.
More significantly, as Obama noted, the ratings agencies that assign values to the health of a country’s credit could downgrade the United States from its current triple-A status.
IMF director Christine Lagarde
That would trigger an exodus of foreign capital, leading to a plunge in the value of the dollar and a rise in interest rates, killing the fragile domestic economic recovery and potentially triggering a global financial tsunami.
“Frankly, to have a default or a significant downgrading of the United States' signature would be a very, very, very serious event, not for the United States alone but for the global economy at large because the consequences would be far-reaching,” warned International Monetary Fund chief, Christine Lagarde.
Charles Rowley, a professor of economics at George Mason University near Washington, said the global stakes couldn't be higher if investors lose confidence in the United States' ability to meet its debt payments.
"The most serious consequence would be contagion, and by 'contagion,' I mean that the impact on America would spread very swiftly across the world -- because America is the major country economically," he said. "A lot of people are holding American debt and a lot of banks are dependent on their honoring of the commitments. So what we're seeing in the eurozone at the moment would be like peanuts by comparison with what would happen if there was a downgrading on this debt."
Possible Constitutional Crisis
If Congress remains unable to reach a deal, some have advised Obama to take unilateral action.
Former President Bill Clinton made headlines last week when he said that if he were in charge, he would raise the debt ceiling under the 14th Amendment to the U.S. Constitution and "force the courts to stop me."
Ratified more than a century ago, in the wake of the U.S. Civil War, the amendment states in part that "the validity of the public debt of the United States…shall not be questioned." But legal experts are split on whether it could be applied to the current crisis.
For now, the White House has discounted the option of unilateral action. It might save the U.S. economy but it would also likely trigger a constitutional crisis.
Obama, who faces his 50th birthday next week, is likely to grow some more gray hairs before his jubilee.
Allan Davydov of RFE/RL’s Russian Service contributed to this report