“Unprecedented economic and financial storm,” were the words chosen by US treasury secretary, Janet Yellen, when asked to give her thoughts on what would come to pass should the US default. On the one hand, they may be ignored as the ramblings of another paranoid economist trying to have their Burry Big Short moment.

On the other, they may not. Before long we may find ourselves watching Bourdain and Robbie explain the US debt ceiling and bond market. In the interest of expediting this process somewhat, I can provide the basics – albeit not in a bubble bath.

The US debt ceiling is a limit placed on the amount of money the US can borrow to pay for their expenses. It is a hard cap that can only be changed by Congress and as of 2021, currently sits at 31.4 trillion. Congress is not at odds with raising the limit and has in fact done so 78 times since 1960. So, where is the issue?

When White House and Congress are united under the same party, it is in the interests of both sides to raise the debt ceiling. When these functions are split however, Congress may wish to hold the White House ransom and force through its own political agenda before agreeing to the raise.

Ultimately, regardless of political faction, an elevation of the ceiling is seen as a must – lest the country and global economy fall into chaos.

We are in the grips of one such occasion with Biden calling for a raise without conditions and House Speaker McCarthy calling for slashes in spending that would eliminate much of what Biden has championed during his tenure.

Throughout history there have been similar instances of Congress and White House staunchly protecting their own interests. The standoff between House Speaker Boehner and Obama springs to mind – a fight which was decided just 72 hours before the government would be forced to default. This time round, the stakes are just as high and the parties just as incompatible.

In the present situation there are only two possible outcomes. The first would see Biden or McCarthy relent on their demands and put the safety of the nation first. The second would see the pair stoically refuse to cooperate and crash headlong in a game of chicken that could give the Cuban Missile Crisis a run for money.

Personally, I try to be optimistic. However, this would not be a very interesting article if it spouted the likelihood of disaster and yet failed to speculate on what might happen if it did actually unfold.

Furthermore, rating agency Standard & Poor’s afforded the nation’s debt a downgraded rating for the first time ever during the 2011 saga. So, while unlikely, it did not venture outside the realms of imagination for those charged with advising people on where to invest their life savings. Yes, the irony of that last sentence is not lost on me given the rating Standard & Poor’s believed subprime securities ought to be prior to 2008. Yet, it is also worth noting that early estimations show the US could run out of money to pay its bills by the 1st of June, so the clock is ticking for a compromise.

The US has never before failed to make payments on their bills. In doing so now, they would be drastically undermining investors’ confidence in the dollar. The effect of this is not merely limited to the US economy either; more than 65 countries currently peg their currency to the US. So, aside from anything else, a failure to pay their bills would send a third of the world into a currency crisis.

It would be a safer bet than US treasuries that the reduction in investor confidence and tanking of the currency would lead to a recession for the US. "Don't worry about your stock portfolio, worry about your job," was the sentiment given by Moody’s Analytics’ Mark Zandi.

Zillow’s analysis is similarly bleak; predicting an interest rate spike of up to 8.4% and an increase in the unemployment rate to 8.3% from its current rate of 3.4%. Higher interest rates would tank the housing market in its already fragile state.

The most obvious impact would be the US failing to make payments to internal services. This in itself would be extremely harmful as the US would probably have to prioritise the funding of some services over others.

Would you cut funding for social securities, Medicare, veteran benefits, or national defence? This could be the question posed to Biden in a few week’s time. Knowing the US, I personally don’t see national defence being downgraded in the order of priorities anytime soon.

In terms of what else the US could do if faced by an unyielding debt ceiling, the options do extend past prioritisation. The idea of a trillion dollar commemorative coin printed by the Treasury has been floated around ever since the Boehner-Obama spat. The coin would in theory underpin the US economy and allow it to continue making payments without falling into a deep recession. It would also cause inflation equivalent to a $3000 tax on every American, so there is that snag.

There is also the 14th Amendment which states boldly; US government debt “shall not be questioned”. Through this the US may attempt to void the debt ceiling due to it’s inconsistency with the constitution. This is a more obvious work-around but would still require a favourable court decision to be upheld.

That is, a favourable court decision from a Supreme Court with a conservative pro-McCarthy majority. Besides, court proceedings take time, and this particular solution may be held up in court far past D-Day on the 1st of June.

Yellen herself has already branded the above two solutions as ‘gimmicky’ and given the danger of an adverse legal challenge to either, I can see why. The government will almost certainly favour prioritisation meaning a return to work for pensioners, veterans, and terminally ill patients alike.

US treasury bonds, once seen as a haven for investors and a standard for international currencies, will be downgraded and alternatives sought. Regardless of what the 14th Amendment says, there will be questions hurled at the US for its poor handling of government debt from inside and out.

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