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In theory here is what will likely happen. I say theory because nobody really knows for sure:
We have enough money to pay a lot of our bills so social security, military pay etc will get handled, at least for a short period of time. However, we will quickly run out. What I read is that if the default lasts longer than 7-10 days we will be out of money and things will start happening.
Among the possibilities are that our credit rating falls which could raise interest rates and cause some serious inflation. We could also see military personnel not getting paid. There is a chance some Social Security and Medicare/Medicaid won't get paid and there are likely government contractors that wouldn't get paid.
The main issue is that if we default, our credit rating goes down and interest goes up it could cause chaos in other markets as they lose confidence in us. This, hypothetically, could cause a huge collapse in markets around the world which could potentially lead to pulling us into another recession.
I really don't think we will default. There are enough options on the table that something will get done. Right now our leaders are just playing a game of chicken to see who blinks first. Eventually someone will. If nobody does and we are left to default both sides will play the blame game. Whichever side ends up on the bottom of that game will likely find themselves out of a job after the 2012 election and neither party wants that.
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