That's the trillion dollar question.
What bothers me is nobody is willing to even hypothesize. That's what screams availability bias to me: we don't know what will happen, so we'll just assume it either won't happen or it will be business as usual.
I don't even know what field (failure-ology? domino-tics?) I need to read in to actually make an informed guess, but the best guess with what little I do know (for a worst case scenario) is the following, in roughly chronological order:
Massive stock market crash
One or more ratings agencies downgrade the US from its AA rating.
Value of the dollar plummets, inflation ($100 is barely enough for even a cheap meal)
Run on the banks. The FDIC theoretically can still bail out failing banks by taking money from non-failing ones but who knows where there is a tipping point before they all fail (and presumably are all taken over by the FDIC). Even if they eventually manage to reopen them all, days or weeks pass before some people can access their accounts.
Government starts bouncing checks to employees, contractors, veterans, social security recipients, etc. They, along with thousands of people who never realized they depended on something that depended on regular checks from the government, are now overdue on their rent/mortgage/bills.
Some employees continue working for IOUs, some stay home, hard to predict which federal services are operating where. State and local services still mostly functioning.
Massive wave of seizures and foreclosures by creditors who are themselves in a desperate financial crunch. At this point, it no longer matters whether or not the debt ceiling is raised, the chain reaction has started.
Bouncing checks and repos trigger riots and in the chaos various ethnic/political/religious grudges also get rekindled. Again, some areas hit harder than others. Probably not a good time to live in an urban slum.
With police over-extended, increase in violent crime and property crime.
With the dollar's lower purchasing power, it's even more expensive to import oil, which has a further inflationary effect on almost every consumer good sold in the US. Food is particularly hit because fertilizers are made with petrochemicals.
Economies of various other nations collapse, with similar results.
...and I don't know what happens next. Presumably at some point someone puts a bullet through your head and takes whatever you have left that's worth stealing. Alcor can't help you because they can't afford liquid nitrogen, nor the cost of transporting your remains to Arizona in the first place. The end.
Total time scale: about a year. Hopefully I'm wrong and hopefully other posters and point out where.
The TEOTWAWKI scenario doesn't look likely. Do note two things:
The Treasury isn't prohibited from spending money or paying back the debt. It's prohibited from borrowing more. Effectively that's the same thing as saying that the Federal governement will have to run a balanced budget starting right now.
The Fed. The Fed can do whatever it wants and guess what it can do -- it can print money! Moreover, it can print money and give it to anyone it likes, for example banks (threatened by bank runs) or, probably, even the Treasury.
Update: Thanks everyone for the continuing thought-provoking discussion. I intend to post my decision spreadsheet, and still am looking for suggestions on where to do so. It might come in handy come February. A discussion that I find interesting has branched off on the topic of technological progress versus Malthusian Crunch, and I started a new article on that over here.
I would like to kick off a discussion about optimal strategies to prepare for the event that the US government fails to raise the debt ceiling before the US Treasury Department's "extraordinary measures" are exhausted, which is estimated to happen sometime between October 17th and mid-November.
This is a risk *caused* by politics, but my goal is to talk about bracing against the event itself if it happens, not the underlying politics. If you want to debate Obama-care, who is at fault, or how likely a US default actually is, please start a separate discussion.
I consider this to be an indirect existential risk because if it kicks off a national or global recession, it will likely slow or halt research and philanthropic efforts at mitigating longer-term existential risks.
Since there are obvious associations between unemployment/poverty and crime, civil unrest, and poor health, a global recession is likely to be to some extent a personal existential risk to those living in the United States or countries that have trade links with the United States.
I notice that the markets do not seem to be anticipating a bad outcome. But I heard one analyst advance the theory that investors simply don't believe the government can (his words) "be that stupid". I imagine there is more than a touch of availability bias as well-- breaching the debt ceiling might, even for fund managers who harbor no illusions about the wisdom of politicians, be up there with science-fictional scenarios like asteroid impact, peak oil, grey goo, global warming, and
terrorist attacks. Moreover, there may be a dangerous feedback loop as the politicians in turn watch the stock indexes and conclude that "the market says there is nothing to worry about".So, I would like to hear what folks who are making contingency plans are doing. Especially people who have training or experience in economics and finance. What do you think the closest parallels in 20th/21st century history are for what the worst case scenario for a US government default would be like? Is there anything you would have done differently if you had known the date for the start of the 2008 recession with a +/- 2 week confidence interval, starting in two days? Or, if you did call it ahead of time, what are you glad you did?