We have various laws that require the federal government to disburse money. However, if we reach our statutory debt limit without Congress raising it, we'll have another law that says the government can't borrow any more money. Matt Yglesias comments:
So we're headed straight for a legal and constitutional crisis that could also become a financial crisis.
What laws does the executive branch follow and which does it break? What litigation will result from any decision, and who will prevail? I think the conventional wisdom actually somewhat overstates the odds of this leading to a total financial meltdown. Worst comes to worst, you pay people with IOUs for a week and then organize an "illegal" debt auction where bonds will sell at a modest premium to currently prevailing rates and ultimately the courts legitimize the option. But that will definitely be a kind of constitutional meltdown that will permanently shake confidence in the American financial and political system.
I don't know if this is exactly how things will unfold, but it's in the right ballpark. I realize that a lot of people are still pushing the platinum coin thing, but keep in mind that even if you don't buy any of the arguments for why it's illegal, it only works if you can deposit the coin at the Fed. And the Fed has already said it wouldn't accept it. So it's not a live option no matter how passionately you believe it's legal.
But if the debt ceiling showdown lasts more than a couple of weeks, it's likely that President Obama will simply order the Treasury to start auctioning bonds regardless. Maybe under the authority of the 14th Amendment, maybe under his authority as commander-in-chief. Maybe he'll declare a state of emergency of some kind. Who knows? But eventually this is how things will work out, with Obama acting because he has to, and because he knows that courts will be loathe to intervene in a political dispute between the executive and legislative branches.
In any case, it would be a helluva mess. Republicans really need to grow up and stop treating the livelihoods of millions of workers and the good faith of the United States as mere partisan chew toys. It's long past time for the business community to stage an intervention.