You are mixing up two distinct, but related issues.
**The government shutdown is caused by Congress not passing a budget for the FY2014 budget. The President issues his budget request to Congress in February for the budget year beginning October 1st. Congress is supposed to debate, argue and horse trade among themselves a budget so it can take effect on October 1st. **
Congress has failed that requirement for a while, instead passing small continuing resolutions (CR) to fund the government at previous fiscal year levels.
This time around the budget debate was hijacked for non-budget, political partisan issues. Since there was no budget nor CR by the time the new fiscal year was to begin, a set of laws kick in requiring federal agencies to close down. The one most talked about is the Antideficiency Act, which simply means if you don’t have authorization to spend you cannot function. Hence the government shutdown. Some agencies function with a different budget cycle and/or are deemed to be performing essential functions (health and safety) that they continue to function. I know for a fact that some agencies had funding that extended their operations for a week or two into the new fiscal year, but were ordered shut down anyway. Something about being in solidarity with the overall budget problem.
Since Congress seems to want to spend more than the government takes in, the government must borrow the rest. Congress itself knows it cannot control itself so it passed a debt ceiling requirement back in 1917!! (It’s been that bad for that long.)
So Congress ends up having to do two things here; (1) it needs to borrow every fiscal year and (2) it has to go on the record by giving itself specific authority to borrow. Otherwise, Congress would end up in the minutiae of directing Treasury to borrow specific amounts for every agency and every program. By using a debt ceiling approach Treasury has the authority to borrow money at any time in any amount up to the debt ceiling. It is a rather effective and efficient process, compared to the the alternative.
The government has already hit the debt ceiling back in May 2013. Since then the government has been transferring monies among accounts to keep itself functioning. In one case, federal employees’ retirement money has been paying for current government operations. This has occurred several times in previous fiscal years, always with the new budget immediately paying back the borrowed retirement monies, with interest.
But the account transferring will be exhausted by October 17th. If Congress does not raise the debt ceiling by then, ** Congress will default on paying for bills where the money has already been spent by Congress.** (The personal equivalent is the failure to pay off completely your monthly credit card debt by the deadline. If you fail to do so by the deadline, your interest rates can skyrocket, the bank could demand immediate payment in full – but often doesn’t – and you could lose assets. )
In the case of a government default, the government’s ability to borrow (at decent rates) could change, or even stop. Creditors could legally demand immediate payment of all outstanding debt (around $17 trillion) and destroy not just the US economy overnight but serious damage the world economy. (Your personal equivalent could be immediate repossession by the bank of your assets.)
At the same time there is a Constitutional clause (14th Amendment, Section 4) that says, “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” It’s possible that some in Congress have this in mind when they threaten not to raise the debt ceiling because it doesn’t matter. Others may be threatening not to raise the debt ceiling for directly the opposite view, that failure to raise the ceiling would be catastrophic.
I view this as a critically stupid game of Russian Roulette, but where there are five bullets in the revolver (with one missing) and not one bullet (with five missing).
As of this morning, the Tea Party is now seriously considering directly tying the debt ceiling issue with the budget issue (and attached non-revenue riders). For me that’s putting in the sixth bullet into the revolver.