This is a rush transcript from "Hannity," July 13, 2011. This copy may not be in its final form and may be updated.

SEAN HANNITY, HOST: The great debt debate rages on tonight on Washington, D.C. as congressional leaders and President Barack Obama have once again failed to reach a deal on how to remedy America's fiscal crisis.

Now, that means, we are one day closer to the August 2nd deadline when it is believed that the U.S. will hit its $14.3 trillion debt ceiling.

And today, Moody's announced that it is placing American's AAA bond rating on review for a potential downgrade due to our risk of default.

At a wildly controversial attempt to avoid this, the Republican leader in the United States Senate yesterday offered up what he called a last choice option to the White House. Now in his plan, which has outraged conservatives, Senator Mitch McConnell would handover to President Obama the authority to repeatedly and unilaterally raise America's borrowing limit unless two-thirds of Congress votes again the hikes.

Now, in my opinion, he's essentially asking Republicans to surrender the very power that brought us to this crisis in the first place yo a man who knows no limits on spending your hard earned money.

And joining me from Alaska with her take on all of this, Fox News contributor, former Alaska governor, Sarah Palin.

Now, first of all, Governor, just standing back from all of this, did you ever imagine in America, $14.3 trillion and we have to raise more money because they can't live within their means?

It's pretty daunting to me.

SARAH PALIN, FORMER ALASKA GOVERNOR: It's absolutely nonsensical, the lack of planning that our leaders are exercising and showing their constituents coming out of D.C. right now, and the lack of understanding that too many have there in D.C., not understanding that Obama's big government, job-killing policies really are the antithesis of what our country needs to get back on the right track to allow us to be exceptional again.

Remember, our country was built on a strong foundation of reward for work ethic and development of our natural resources. And here we've gone in the complete opposite direction under Obama with both those cornerstones. And we are where we are now with, as you mentioned in your intro, Moody's telling us that our AAA rating is under review now because we don't have a plan to get us back on that solid footing.

HANNITY: All right, here's -- we've got to look at political reality and -- and we've got to look at reality in terms of what we can get done now with where we are. The Republicans only have one -- one piece of Congress. They have the House. We have the United States Senate, Harry Reid runs that. The president runs the White House.

What would be acceptable -- because you're a conservative, you're well known in the Tea Party, you're a Tea Party leader. I'm a conservative, a registered conservative. I would prefer cut, cap and balance. But I mean cut now, not later, not 12 years down the road.

If you can't get that through, the country can't default. I think that's a reality you agree with, is that correct?

PALIN: Sure. We cannot default, but we have to -- we cannot afford to retreat right now, either. Now is not the time to retreat.

HANNITY: Right.

PALIN: This is the time to reload. And we reload with reality by giving facts and numbers to the American public so that those of us across the U.S. can start chiming in and letting our representatives know that we will not capitulate, we will not hand over more power, which I believe is unconstitutional, to President Obama to further manipulate our economy.

You know, Article 1, Section 8 of our Constitution spells out that Congress has the power of the purse strings. So this plan of -- of McConnell's I think makes no sense, because it does cede power to our president and takes away that authority that is inherent in Congress to control the economic decisions that have to be made when it comes to debt.

HANNITY: Yes. I don't want them passing the buck and handing the keys over to Barack Obama. All right, maybe he has to make dollar for dollar cuts, but he's going to use phony accounting methods. He's going to gut our Defense Department. And I wouldn't cede that responsibility to him. It's like handing the -- the keys to the car to a teenager who doesn't have his learning permit.

PALIN: Yes, absolutely. And -- and, again, as I pointed out, the numbers speak for themselves. When you look at our economic woes and things that have gotten so much worse under President Obama, we -- we cannot trust him to further manipulate our economy, to further manipulate our U.S. energy supply and the value of our currency via his support of the Fed's monetizing our debt and QE2 and now talk of QE3 and perhaps QE4, just printing more money out of thin air to service our debt.

But the plans under Obama are making absolutely no sense. And that is why McConnell and Boehner, our leaders in Congress and in the Senate, have to be stronger than ever -- no retreat, no capitulation -- but allowing President Obama to understand some free-market, time-tested principles that work for a pro-private sector agenda that we need to get the economy back on the right track.

HANNITY: Right.

PALIN: We cannot afford to back off and just hand him, with the white flags waving in front of him, a white flag saying, here, Mr. President, we trust you, you take over --

HANNITY: Yes, I agree with you.

PALIN: -- you do it. Because our president has failed in that arena.

HANNITY: I -- all right. Now, as it --- as it relates to what you said, retreat, capitulation, here's what the president's strategy has been -- class warfare, even -- even if he raised taxes on people with private jets, it's $300 million. It's nothing. Scare the elderly. Scare veterans. Scare the disabled.

It seems to me that there's a way to put the shoe on the other foot here. And I think what Congress -- I have a plan and an idea where Congress would go ahead and they would protect Social Security, raise the debt ceiling, put the cuts in place, at least dollar for dollar, make sure that they are immediate, and then hand it off to the Senate and the president. And then, if they failed to pass it and sign it, then it's on their shoulders.

Does that seem like a good short-term plan until the election?

PALIN: Well, you know, I'm still not one to buy into this notion that we must incur more debt, we must increase the debt ceiling by August 2nd, otherwise, you know, there will be catastrophe. I -- I still don't believe that that's necessarily the case. And we --

HANNITY: I agree with you.

PALIN: -- we have the $200 billion coming into the federal government every month. It takes $35 billion --- I'm sorry, billion dollars -- we have $35 billion that we must use to service the debt, $50 billion that we must use to write those Social Security checks, $2.9 billion to pay for our military personnel, and then other essentials.

You prioritize. Our president essentially suggested the other day that he's not able to prioritize. As the chief executive of our nation, he cannot prioritize, and that's why he suggested that Social Security checks may not be written come August 2nd if that debt ceiling isn't increased.

No. You pay for the essentials first and then the non-essentials have to get cut. They have to wait. That -- that's --

HANNITY: So you would --

PALIN: -- just reality.

HANNITY: -- so, Governor, you wouldn't raise the debt ceiling at all?

You'd -- like I have the numbers in front of me. For example, we take in $200 billion every month. We have $29 billion in interest on the debt, $49 billion for Social Security, $50 billion Medicare/Medicaid, $2.9 billion, as you pointed out, for the active military, Veterans Affairs, $2.9 billion. So there's only $39 billion left.

So basically, you know, the FBI, the CIA, all these agencies then, would -- would risk shutting down. Now, I wouldn't mind the EPA, perhaps.

But there is a risk there at that point politically, is there not?