Happy Debt Limit Day! The US government has officially reached the ceiling for the amount of debt it can float, $14.294 trillion. This does not yet mean that the government can no longer borrow money or fund operations, at least not yet. Tax dollars flow into the Treasury on a regular basis and can be used for ongoing operations. And there are a number of actions Treasury Secretary Timothy Geithner can take to allow the space to keep the borrowing coming and meet the country’s financial obligations. Some have already been triggered, like ending state and local government bond issues. Today, Geithner begins to borrow from federal pension funds.

The Obama administration will begin to tap federal retiree programs to help fund operations after the government loses its ability Monday to borrow more money from the public, adding urgency to efforts in Washington to fashion a compromise over the debt [...]

Geithner, who has already suspended a program that helps state and local government manage their finances, will begin to borrow from retirement funds for federal workers. The measure won’t have an impact on retirees because the Treasury is legally required to reimburse the program.

That’s true as a statutory matter, but messing with federal pension funds could give renewed vigor to a proposal being discussed to raise the amount federal employees contribute to their pensions.

The Wall Street Journal has has a graphic listing some of the other routine options Geithner will tap to keep under the debt limit. He will be able to allow himself roughly $300 billion in headroom, delaying any potential default until August 2. He can likely go no further than that. And the consequences of default could be dire for the US and the world.

But there isn’t really a deal on the table, with 11 weeks to go, that would actually allow for a vote on the debt limit increase. Democrats and Republicans agree on the general need to increase it, but not on the specifics. Most Democrats prefer a clean increase in the debt limit; Republicans want deep cuts to spending programs and a structural reform of the budget process. Talks have considered a spending cap or a deficit cap, which would trigger reductions either through spending cuts only or a mix of spending cuts and revenue increases, if certain conditions were not met.

Members of the GOP rank and file have even downplayed the threat of default or the specific date of when it would be triggered, saying the US could sell assets if they neared the deadline. Last week, a senior Administration official described the doubters of the seriousness of the debt limit as “the type of people who get eaten by bears.”

The biggest boosters of increasing the debt limit are members of the business community and Wall Street, who have pleaded with Republicans not to play chicken with the debt limit. Privately, House Speaker John Boehner has told this group that the debt limit will be increased, but we could easily reach a tipping point where the markets despair and crash before the official deadline. So far that hasn’t happened; US borrowing costs remain quite low.

Paul Krugman calls it a hostage situation:

Now, predictably, the hostage-takers are back: blackmail worked well last December, so why not try it again? This time House Republicans say they will refuse to raise the debt ceiling — a step that could inflict major economic damage — unless Mr. Obama agrees to large spending cuts, even as they rule out any tax increase whatsoever. And the question becomes what, if anything, will get the president to say no.

If the president and his allies operate on the principle that failure to raise the debt ceiling is an unthinkable outcome, to be avoided at all cost, then they have ceded all power to those willing to bring that outcome about. In effect, they will have ripped up the Constitution and given control over America’s government to a party that only controls one house of Congress, but claims to be willing to bring down the economy unless it gets what it wants.

According to Harry Reid, the Senate majority leader, Mr. Obama has told Democrats not to draw any “line in the sand” in debt negotiations. Well, count me among those who find this strategy completely baffling. At some point — and sooner rather than later — the president has to draw a line. Otherwise, he might as well move out of the White House, and hand the keys over to the Tea Party.

Right now there’s the negotiations occurring between Joe Biden and leaders in both parties, and basically nothing else. The news from the Biden talks reflect a very small portion of the $4 trillion in deficit cuts commonly used as a benchmark. It looks like this dangerous game will drag out for months.