Mounting U.S. Debt Makes Fiscal Crisis More Likely

How's this for a cold open? "Over the past few years, U.S. government debt held by the public has grown rapidly—to the point that, compared with the total output of the economy, it is now higher than it has ever been except during the period around World War II." That's the depressing first line from the Congressional Budget Office's new report on how America's crushing debt-load increases the long-term likelihood of a fiscal crisis. Without significant policy reforms, the report warns, "growing budget deficits will cause debt to rise to unsupportable levels."

But right now, those reforms are nowhere to be found. Using the rosiest possible assumptions, the administration admits the country's debt-to-GDP ratio will hit 77 percent by 2020. The CBO, more pessimistically, says we'll hit 90 percent over the next decade. (Incidentally, this is one of the reasons to pay close attention to the CBO; it's not a perfect check, but it helps keeps the administration, which has greater incentive to be overly optimistic, honest.) And those figures only account for publicly held debt. If you tally up gross government debt, the CBO expects us to hit 94 percent this year.

It's all very grim—in part because high debt levels tend to stifle investments elsewhere. And in part, as the CBO says, because "a growing level of federal debt would also increase the probability of a sudden fiscal crisis." As long as debt's growing, in other words, the risk of a fiscal crisis grows too.

Moody's, which rates investments, has already indicated that the U.S. is on its way to losing its credit rating—a signal that investors may be beginning to consider the U.S. less of a sure thing. As the CBO report notes, "investors become unwilling to finance all of a government's borrowing needs unless they are compensated with very high interest rates; as a result, the interest rates on government debt rise suddenly and sharply relative to rates of return on other assets."

President Obama and his economic advisers have more or less acknowledged the problem. But what have they done? Not much: The White House budget fails to meet the president's own stated deficit reduction targets, choosing, instead, to cross its fingers and hope that a fiscal commission assigned to study the problem will swoop in during December and save the day. Does anyone in Washington really think presidential commissions work? Can we set up a presidential commission to study the question?