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

Debt Problem

Here we are a year later, and has much changed in the way of the debt crisis? Debt relief from a federal level all the way down to individual consumer levels is likely to be at the forefront of the just starting election cycle. The statistics in this article as dictated by the Peterson-Pew Commission show some scary trends. Projecting that the debt-to-GDP could reach 90% is almost hard to believe. Unfortunately, if we continue with the status quo there will be nothing to stop it from reaching such dangerous heights. It is my hope that a sound plan can be developed. I don't envision this being an overnight, quick fix, but rather a gradual process. I think as part of this process, the public needs to be educated. Federal budgets aren't easy to understand, however, I think it's essential that everyone understands that unbridled spending jeopardizes all in the long run.

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