Debt Crisis Looming; Political and Market Risks Run Large

Yesterday, The Committee for a Responsible Federal Budget hosted a chilling conference on “What a Fiscal Crisis Would Look Like in the U.S.” An all-star group discussed: what a tipping point might be; how a crisis might unfold; and what policies would be best to avoid a crisis. There was a clear consensus in the room that without changes, a crisis in inevitable.

Some of the possible tipping points participants mentioned included: Congress’s failure to adopt a budget resolution, policy deadlocks within the President’s fiscal commission, state budget crises, costly natural disasters, or a creditor outside the U.S. simply deciding to invest at home. The psychology of the financial markets is unpredictable, one analyst said, adding that a precipitating factor could be "anything." The biggest risk is laziness, another said, commenting that the financial markets are based on faith and that the fiscal standing of the United States will drop when people lose faith that policymakers can control fiscal matters.

Today’s market rollercoaster shows the U.S. is extremely vulnerable to debt jitters—even those that originate across the globe.

The current fiscal path of the nation is unsustainable, as the Peterson-Pew Commission on budget reform has pointed out. For the past forty years, the nation's debt-to-GDP ratio has averaged about 40 percent. This year, it's projected to reach 60 percent and by the end of the decade, it is expected to reach 90 percent, with levels continuing to rise. If investors lose confidence in the U.S., interest rates will soar, job creation will slow and the financial health of Americans will deteriorate.

The key is to make a commitment to a credible plan now. The Peterson-Pew Commission on Budget reform has recommended that policymakers make a commitment to stabilizing the debt by 2018, and to phase in policy changes beginning in 2012