The U.S. Congress will almost certainly approve an increase in the debt ceiling before the Aug. 2 deadline. But what if it doesn't?

There is no doubt in my mind (well, not much) that the U.S. Congress will find a way out of the debt ceiling impasse. But what if it failed? Here are some of the likely consequences.

U.S. Treasuries would be hit. So far, bond traders have acted as if there were no conflict in Washington. Prices of U.S. Treasury bonds have held firm, buoyed in part by an influx of hot money fleeing an even hotter trouble spot, Europe. Even if there is no agreement on raising the debt ceiling, it is extremely unlikely that the U.S. would suspend interest payments on its debt, which will total about US$29 billion in August. So there would be no bond default, at least not technically. But investor confidence would be shaken. Yields on Treasuries would rise and prices would drop, although it's impossible to predict by how much. The situation would be exacerbated if any of the major rating agencies should follow through on their warnings and cut the U.S. credit rating from AAA. Not only would that further undermine confidence in U.S. Treasuries but it would increase America's future borrowing costs, thereby adding even more to the debt interest price tag.

Stock markets would crash. Let's not kid ourselves  stock markets around the world would be walloped. Think about it. If a credit crisis in tiny Greece can unnerve investors, how would they react to a technical bankruptcy of the U.S. government? On the other hand, let's not think about it.

The loonie would soar. Quick now: how many "safe" currencies would be left in the world if the unthinkable happens? The Swiss franc. The Australian dollar. The loonie. That's about it. The Chinese yuan should be safe, except that it is pretty much pegged to the U.S. dollar. Beijing might have to do a hurried rethink of that policy.

Canadian bond prices would rise. In world terms, our bond market is very small and supply is limited. But if confidence in U.S. Treasuries should weaken, investors would look to the sovereign bonds of the few fiscally and politically stable countries left: Switzerland, Australia, and Canada. Prices would rise with the spike in demand and yields would tumble. This week, the yield on five-year Canadas was 2.75 per cent, compared to 1.5 per cent for U.S. Treasuries. That could be reversed, and then some, in the event of a failure to resolve this issue.

Gold would keep rising. The debt crisis has already pushed the price of bullion to record highs. Central banks are reported to be buying tonnes of the precious metal in lieu of U.S. dollars. What would happen in the event of a prolonged U.S. financial impasse? How does US$2,000 an ounce sound? What about US$5,000 an ounce, which economist Patricia Croft suggested on CBC was feasible in the event of financial Armageddon?

Social unrest could take hold. Washington is not collecting enough money to pay all its bills. If there is no agreement on the debt ceiling, the government won't be able to borrow enough to make up the difference. Assuming bond holders get paid their interest, someone is going to suffer as a result. It could be the military, veterans, Social Security payees, unemployment insurance recipients, federal employees  the government apparently has a list of priorities but is not revealing it yet. If the situation continues for any length of time, you can be sure there will be protest demonstrations and perhaps worse.

All in all, it's not a pretty picture.