What would be the result of a default?

Suppose that the US Congress were to fail to raise the debt limit. What would be the consequence?

Let's be clear what we're talking about. I'm thinking of a failure to pay some fraction of holders of US treasuries, or US debt. I'm not thinking of a full-scale default (that is, all treasuries are worthless), but just that some treasuries are not paid in full.

The immediate effect would be that treasuries would be considered more risky. Demand for treasuries would fall as investors who held treasuries tried to sell them and put their money in other forms. This would cause interest rates to rise.

What would be the consequence of this? It's important to understand that US debt is not just any asset. It's considered a very safe asset, pretty much the safest asset there is. Now safe assets play a particular role in the economic system. They have high "liquidity", which means that their value can be accessed in a hurry, and in all states of the world. Companies, especially in the financial sector, like to keep a good bit of their net worth in very liquid assets so that they don't run into short-run financing problems which might force them to sell less liquid assets at a loss.

If something happens that reduces the supply of safe assets in the economy, this leads to a reduction in liquidity and what's commonly called a "liquidity crisis". We had one of those in Fall 2008, when a bunch of assets (basically assets based on slices of mortgages) that had been perceived as quite safe turned out to be very risky. The total value of those assets was quite small relative to the value of US debt in the world economy right now. Thus a default on treasuries would represent a much much larger decrease in the supply of liquidity in the world economy. This would likely precipitate a financial crisis many times the size of the one we saw in Fall 2008.