Consider the following scenario: No debt or debt ceiling deal is reached. August 2 comes and goes. Nothing happens. Bond markets don't crack up. Life goes on.
You fill in the blanks. Here's my picture:
Pundits will assume the debt ceiling limit has been breached. A 14th Amendment defense. Treasury and the Fed will say no: the US has issued no new debt.
Because chaos can ensue when large numbers of people no longer understand how the world around them is working, the President will not wait long to talk. He will tell the American people that the country does not really need to sell debt to fund its deficit, that it can credit individual accounts and overall bank reserves with "keystrokes". The debt ceiling legislation and the practice of funding deficits with bond issues are just that - they are practices, not requirements of monetary economics.
Republicans will say they have been tricked. The President will continue his reasonableness, and say, correctly, he really wanted a debt/revenue deal, and he was willing to go a long way to get it. The unspoken message will be: it's not up to me to teach you monetary economics.
Will the public see this as dirty tricks? The President is guessing no, and I suspect he's right. He did want the debt/spending/revenue deal and he was willing to use the August 2 "deadline" as a hard cutoff date in order to raise the chances of getting a deal.
Republicans will be really and truly ambushed. They will have demonstrated their willingness to let the US go into the abyss, and at the same time they will have shown they have no idea about the underlying workings of our economy.
Here is a good link explaining why Treasury does not need to sell bonds to pay the bills - http://www.creditwritedowns.com/2009/11/if-the-u-s-stopped-issuing-treasuries-would-it-go-broke.html.
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