Federal Government Operations: For Aug. 3-31, 2011, we project inflows of $172 billion and bills due of $306 billion — a shortfall of $134 billion. As an illustration, Treasury would exhaust all inflows just by paying six major items: interest, Medicare, Medicaid, Social Security, unemployment insurance and defense vendors. Without cutting from these six, there would be no money for entire departments such as Justice, Labor and Commerce among many others, or for veterans’ benefits, IRS refunds, military active duty pay, federal salaries and benefits, special education, Pell Grants for college students or food and rent payments for the poor. An overnight 44 percent cut in spending would slash many popular and essential programs.

Particular August days will be far worse than the monthly totals suggest. For example, on Aug. 3, we project that the government will have about $12 billion in receipts and $32 billion in committed payments, including a $23 billion Social Security payment. And Aug. 15 presents a triple threat: a $19 billion daily deficit, a $29 billion interest payment and a quarterly refunding auction to pay off a maturing $27 billion bond.

Market Risks: If Treasury is forced to prioritize, the rating agencies will immediately put our sovereign debt on watch for a downgrade, at a minimum. There will be intense global media focus as the United States is shown for the first time to be unwilling or unable to meet its obligations.

The major source of market risk could be the need to “roll over” almost $500 billion in maturing Treasury securities in August 2011. New securities must be sold to the public to generate the cash to pay off the maturing securities. There would probably be buyers but at higher interest rates. In turn, higher rates could mean slower economic growth and further depressed housing prices.