Of the US$ 14 trillion of debt outstanding by December 2010, around US$ 5.6 were held by the Fed and other intra-government agencies (Fed holds around US$ 1.6; see Dean Baker's proposal and discussion here). So if the Fed buys debt, to monetize it, it just reduces the privately held part of the debt and increases the publicly held, but it cannot increase the total amount. The graph below shows the public, private, and the foreign (within the private) held shares of US public debt.
Well understood what the debt-ceiling limit implies is a fiscal restriction, and it would force drastic cuts in spending. Consider it a very large government shutdown. So in reply to Nick, if you are Keynesian, and believe your model, this is really bad news.