(CNSNews.com) – The Congressional Budget Office is warning that unless the federal government can control its appetite for deficit spending, the accumulated national debt could spark a fiscal crisis similar to those experienced by Greece and Ireland earlier this year.
The non-partisan congressional accounting office – in a little-noticed July report – said the combination of a massive national debt and another fiscal downturn could spark the debt crisis.“Combined with an unfavorable long-term budget outlook, it would increase the probability of a fiscal crisis for the United States,” CBO said. “In such a crisis, investors become unwilling to finance all of a government’s borrowing needs unless they are compensated with very high interest rates.”
In such a scenario, borrowing becomes prohibitively expensive for the government because the interest rates and repayment schedules demanded by mistrustful investors force the government to devote too much of its budget to servicing the debt. This poor fiscal situation can spiral out of control, CBO explained, because the government would need to borrow more money – at even less favorable terms – to continue functioning.
CBO admitted that, just as with the Greek and Irish debt crises of 2009-2010, there is no exact way to predict when a country will experience a debt crisis. However, as a general rule, the more debt a country has, the greater the chance of a crisis.
“Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States; in particular, there is no identifiable tipping point of debt relative to GDP indicating that a crisis is likely or imminent. But all else being equal, the higher the debt, the greater the risk of such a crisis.”
Such a crisis would most likely occur during another period of economic recession, particularly if the government decides to enact another large, deficit-financed spending package.
“Fiscal crises around the world have often begun during recessions and, in turn, have often exacerbated them. Frequently, such a crisis was triggered by news that a government would, for any number of reasons, need to borrow an unexpectedly large amount of money,” CBO said.
A debt crisis would then make a recession worse, since the already high levels of debt would make stimulus spending nearly impossible, since the borrowing required to provide the stimulus would be too expensive.
Conversely, the government would find it extremely difficult to raise enough taxes to reassure investors during a recession because doing so would drain what little money was being spent in the private sector, thereby driving the economy further into recession.
CBO acknowledged that Greece and Ireland are not perfect examples, since the U.S. might be able to take on more debt than other countries because of the sheer size and diversity of its economy.
However, CBO warned that the low savings rate of most Americans could mean that the U.S. would suffer a debt crisis sooner, because a low savings rate would restrict the ability of the government to raise taxes.
“On the one hand, the United States may be able to issue more debt (relative to output) than the governments of other countries can, without triggering a crisis, because the United States has often been viewed as a ‘safe haven’ by investors around the world, and the U.S. government’s securities have often been viewed as being among the safest investments in the world.
“On the other hand, the United States may not be able to issue as much debt as the governments of other countries can because the private saving rate has been lower in the United States than in most developed countries, and a significant share of U.S. debt has been sold to foreign investors,” CBO explained.
Regardless of when the debt crisis occurs, CBO said, the government would face several difficult choices in order to get out of it. Two of those choices – restructuring or defaulting and printing money – would result in serious, long-term negative consequences for the U.S.
Restructuring U.S. debt would make borrowing extremely difficult for years or decades because investors both foreign and domestic would not view the government as credible.
Printing money would, in CBO’s estimation, also be a poor decision because while it would make the current national debt smaller – due to the devalued dollar – it would also make future borrowing harder; this time due to the fact that printing money would increase future deficits.
The third – an austerity program of some kind – would also have negative consequences but is the only option that could potentially prevent a fiscal crisis from happening at all. Even if an austerity program were adopted during a debt crisis, the downsides would not be as sever when compared to the other two options.
“The later thatactions are taken to address persistent budget imbalances, the more severe they will have to be,” CBO said. “Actions taken later, particularly if there was a fiscal crisis, would need to be significantly greater to achieve that same objective. Larger and more abrupt changes in fiscal policy, such as substantial cuts in government benefit programs, would be more difficult for people to adjust to than smaller and more gradual changes.”
