Suppose that we hit the debt ceiling, and that the Treasury manages to engage in “prioritization” — paying interest on bonds, so that all the burden falls on other kinds of spending. How should we think about the economic impact?

Well, here’s one thought. Right now, the cash-flow deficit is a bit more than 4 percent of GDP:

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This deficit would have to be closed immediately, cold turkey, in the event of a debt-ceiling breach. Probably the default — because it would be a default, even if interest payments are being made — would take the form of a “delayed payment regime“, with the government falling ever further behind on its bills.

So, when did we last see a spending shock this big? As it happens, we’re looking at something just about the size of the post-bubble housing bust, which was also about 4 percent of GDP:

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You can argue that these spending cuts wouldn’t have as much impact as the housing bust, because payment would be delayed, not cancelled, and at least some players would continue to expect eventual payment. On the other hand, as I pointed out in my last post, this time around we would have disconnected the automatic stabilizers — as GDP fell, revenues would fall, forcing another round of spending cuts, and so on.

Again, my point is that we could well be looking at a Great Recession-sized event even if we avoid a purely financial crisis.