Low on cash and tapped out on its credit limit, the federal government will limp into an uncertain economic future on Thursday if Congress does not reach a deal to raise the federal debt limit.

Q What happens if the debt limit is not extended?

A Without the ability to borrow more money and add to the nation's $16.7 trillion debt, the Treasury will be left with about $30 billion to cover government spending that's estimated at $60 billion per day.

With the world's largest borrower in default, the effects will reverberate around the globe -- while hitting everyday Americans, banks and Wall Street investors at home. Many experts predict that the financial calamity will be worse than the fallout from the 2008 economic collapse and will drive the U.S. into another recession.

Q When will I start to feel the effects?

A The short answer: No one really knows. But the U.S. government might delay payments for everything from Social Security, Medicare, Medicaid and IRS tax refunds. The value of the dollar would plunge while interest rates would skyrocket, increasing the cost of credit cards, student loans and all types of borrowing for Americans and businesses big and small -- if they even qualify for loans amid a shattered worldwide economy.

Interest rates on new mortgages are expected to rise, which would take a bigger chunk out of family budgets, slow home sales and damage the recovering housing market. Stock markets are expected to fall into turmoil. And because the U.S. would be in default, foreign governments, banks and others would take massive hits on the value of their usually reliable Treasury notes.


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Q What can I do to protect my finances?

A "There's really not too much an individual can do in the short run," said Fred Foldvary, a retired economics professor from Santa Clara University who now lectures in public finance and law and economics at San Jose State.

But there are a couple of tricks, including parking any cash in a savings account to avoid the possibility of stock market chaos. Those worried about a drop in the market can turn to bear market funds tied to the S&P 500 that rise in value when the stock market falls, he said. Of course, "there is always risk," Foldvary added. "You would lose money if the stock market shot up."

Otherwise, Foldvary recommends that people keep their money in their retirement accounts, which are designed to grow over the long haul.

"Don't panic," he said.

Q How will the federal government function if it defaults on its financial obligations?

A The U.S. already owes $1.3 trillion to China and $1.1 trillion to Japan. Without the ability to borrow even more, the Treasury will have to rely on taxes and fees to keep the lights on and continue to pay an estimated 68 percent of its bills. The Bipartisan Policy Center estimates that federal spending will immediately plummet 32 percent. Goldman Sachs estimates that government spending almost immediately will drop by $175 billion -- or about 1 percent of the overall U.S. economy.

Q What's the long-term impact of this?

A According to the Treasury Department, the result of high interest rates, reduced investment, higher debt payments and slow economic growth could linger for more than a generation.

Contact Dan Nakaso at 408-271-3648. Follow him at Twitter.com/dannakaso.