One way to close the deficit without screwing over seniors would be to have the Federal Reserve sell off a portion of its holdings, the profit from which by law must be paid to the Treasury:
The Federal Reserve may be able to fund the U.S. government if no deal to raise the debt ceiling is reached.
The Fed currently owns about $1.63 trillion of Treasurys. It can sell these through its open market operations . All Fed income that exceeds the Fed’s costs are remitted to the U.S. Treasury Department. Which means that the revenues from selling Treasurys could be used to fund government operations instead of borrowing.
Sales of Treasurys by the Fed would not violate the debt ceiling laws, because the debt has already been issued. It is already counted against the debt ceiling.
The U.S. government borrows around $125 billion each month. This means that, at least in theory, it is possible for the Fed to fully fund the borrowing needs of the U.S. government for nearly a year.
Since the Treasury is not currently issuing bonds due to the debt ceiling stalemate, the Federal Reserve could meet market demand by releasing its holdings:
The Fed typically sells U.S. government debt when it wants to take money out of the system in order to reduce inflationary pressures. In ordinary times, such sales raise interest rates, because the market is oversupplied with U.S. government debt.
But rates wouldn’t necessarily rise if the Fed was selling at a time when the U.S. Treasury is not. In fact, they might fall because the unwillingness of the U.S. government to issue more debt would potentially create a supply shortage.
Update: According to Stone & McCarthy, the FED can generate half a trillion dollars for the Treasury (pushing the default date into 2012):
Book Profits
The Fed holds roundly $2.6 trln in the System Open Market Account (SOMA). Some of these securities were purchased at a time when market interest rates were substantially above current levels. This subset of SOMA represents securities on which the Fed has unrealised profits. Prior to the onset of the crisis the Fed held roundly $160 bln of Treasuries with maturities in excess of 5 years. These securities have accrued substantial unrealized profits.
The Fed could sell some of these securities, book the profits, and then repatriate those profits to the Treasury. If desired, the Fed could reinvest the par value of those securities back into newer Treasuries to maintain the par value of its holdings.
Prepay Expenses
Every week the Fed repatriates its profits to the Treasury. The weekly profits of the Fed largely represent the weekly accrued interest income from the Fed's SOMA, minus interest expense, operating expenses and accrued dividends.
The other portion of the funds would come from revaluing its gold holdings:
Gold
The Treasury holds 261,498,899.316 troy ounces of Gold with a book value of $11.041 bln at $42.22/oz. The Treasury has monetized this gold by issuing to the Federal Reserve gold certificates in an equal amount ($11.041 bln). The monetization of gold effectively was an accounting entry providing an increase in Fed assets (gold certificates) and an associated increase in the Treasury's cash deposit at the Federal Reserve.
The $42.22/oz official price of gold was last set in 1973. Given that gold is trading above $1,600/oz could the Treasury prevail upon Congress to increase the official price?