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US Military Could Suffer If No Debt Deal: Bush Aide

There's be no money for U.S. defense as of Aug. 3 if there is no deal on the debt under a worst-case scenario, former Treasury undersecretary Jay Powell told CNBC Monday.

Powell, who worked in the George H.W. Bush administration and is now a visiting scholar at the Bipartisan Policy Center, thinks the "odds are good" Congress and the Obama administration will reach a deal to raise the debt ceiling by Aug. 2.

He doesn't think a bond default is likely if no deal is reached. But there's a bigger issue: No deal means 44 percent of federal spending will be cut overnight, which he likened to having 100 people trying to get into a lifeboat that seats 56.

"The bottom line is, you can't cut overnight 44 percent of spending without cutting a lot of popular and important programs," he said.

What might happen? He gave two scenarios.

Scenario 1: Pay for food stamps, Medicare, Medicaid, Social Security and interest on the debt. This leaves "no money for defense whatsoever," Powell said.

Scenario 2: Pay those programs except for food stamps. That would allow funding for defense and unemployment insurance but would leave no money for active duty military pay or law enforcement.

"You shut down the entire Justice Department, open the prisons, let everybody go, no courts, no FBI, no Bureau of Alcohol, Tobacco and Firearms," he said. "That, obviously, can't happen."

Does the Treasury Dept. have a "plan B" if the debt ceiling isn't raised?

"You have to assume that there is," Powell said. "You have to assume that because that's part of the job description, 'What if, there's no debt ceiling increase.'"

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