A Preventable Crisis: Exploring Fiscal Crisis Scenarios for the United States

In its new paper “A Preventable Crisis: Exploring Fiscal Crisis Scenarios for the United States”, the Fiscal Roadmap Project of the Committee for a Responsible Federal Budget looks at the increased risk of a sovereign debt crisis for the United States if our current budget course is not changed.

Several generations from now, based on basic budget accounting, there is no question that we will not be able to manage or sustain the fiscal situation expected to result if current policies are continued. A fiscal crisis will occur.

In the nearer future, the crisis outlook is far less certain. We may be able to muddle through for a time. Extra running room to borrow even more from global capital markets may indeed help us avoid problems now because we’re still the world’s largest economy, because we’re still the safe haven in contrast to everyone else (other countries look worse or are still emerging), and because demand for the dollar remains strong for several reasons.

However, while the immediate outlook is not obviously threatening, we must be very sobered by the fact that we are heading toward fiscal territory in which we have at best limited experience – and without enough savings. While there is not an extremely high probability that we will have an acute crisis tomorrow, the risks of one have increased.

The paper looks at our fiscal future in the context of increased risks to the United States’ ability to manage its fiscal, economic and financial affairs – not in terms of the inevitability of an acute debt crisis in the near future. The paper describes critical points of weakness (or vulnerability) that could become crisis flash points, as they interact with our fiscal problems.

Whether we are able to manage and address our increased risks or whether they will turn into a crisis is the big question.

The paper presents six realistic illustrative crisis scenarios in which we cannot manage a complex series of challenges or in which we are faced with a sudden turn of events (shocks) that we cannot handle normally. The scenarios include a gradual crisis (we muddle along up to a point), a political risk crisis (where political calculations trump risk threats), an inflation crisis (higher debt is managed through inflation), an external crisis (a dollar or trade crisis leads to a fiscal crisis), a catastrophic budget failure (an abrupt crisis), and a default crisis.

While the analysis is sobering, the message is in the end positive. We can act in the near future to minimize our risks and to avoid a full blown crisis. If we can come to an agreement on a multiyear fiscal recovery plan, to be implemented when the economy is on firmer footing, the costs of having adjustment forced on us down the road will be minimized. The American taxpayer has the capacity and courage to move forward to meet these challenges in a thoughtful, smart and human way.

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