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CBO: Deficit Will Cause ‘Financial Crisis’

From the (highly partisan) Congressional Budget Office’s Director’s Blog:

Note: The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget projections through 2020 (with adjustments for the recently enacted health care legislation) and then extending the baseline concept for the rest of the long-term projection period. The alternative fiscal scenario incorporates several changes to current law that are widely expected to occur or that would modify some provisions that might be difficult to sustain for a long period.

Federal Debt and the Risk of a Financial Crisis

July 27th, 2010 by Douglas Elmendorf

In fiscal crises in a number of countries around the world, investors have lost confidence in governments’ abilities to manage their budgets, and those governments have lost their ability to borrow at affordable rates. With U.S. government debt already at a level that is high by historical standards, and the prospect that, under current policies, federal debt would continue to grow, it is possible that interest rates might rise gradually as investors’ confidence in the U.S. government’s finances declined, giving legislators sufficient time to make policy choices that could avert a crisis. It is also possible, however, that investors would lose confidence abruptly and interest rates on government debt would rise sharply, as evidenced by the experiences of other countries.

Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States. In a brief ("Federal Debt and the Risk of a Fiscal Crisis" [a pdf file]) released today, CBO notes that there is no identifiable “tipping point” of debt relative to the nation’s output (gross domestic product, or GDP) that would indicate that such a crisis is likely or imminent. However, in the United States, the ratio of federal debt to GDP is climbing into unfamiliar territory—and all else being equal, the higher the debt, the greater the risk of such a crisis.

Over the past few years, U.S. government debt held by the public has grown rapidly. According to CBO’s projections, federal debt held by the public will stand at 62 percent of GDP at the end of fiscal year 2010, having risen from 36 percent at the end of fiscal year 2007, just before the recession began. In only one other period in U.S. history—during and shortly after World War II—has that figure exceeded 50 percent.

This is simply a stunning fact. And, lest we forget, the Democrats took complete control of the purse strings in 2007. This is the Democrats’ deficit. They own owe it.

Further increases in federal debt relative to the nation’s output almost certainly lie ahead if current policies remain in place.

Which is kind of odd for the CBO to admit, given that they have previously claimed that every one of Mr. Obama’s entitlement programs would reduce the deficit.

The aging of the population and rising costs for health care will push federal spending, measured as a percentage of GDP, well above the levels experienced in recent decades. Unless policymakers restrain the growth of spending, increase revenues significantly as a share of GDP, or adopt some combination of those two approaches, growing budget deficits will cause debt to rise to unsupportable levels, as shown in the figure [above].

Once again, this is the CBO doing their masters’ bidding and demanding that we jack up our current taxes and create new ones.

Although deficits during or shortly after a recession generally hasten economic recovery,

What a preposterous claim. But that is what Mr. Obama’s people dictated, and so that is what he had to write.

[P]ersistent deficits and continually mounting debt would have several negative economic consequences for the United States. Some of those consequences would arise gradually—but a high level of federal debt, combined with an unfavorable long-term budget outlook, would also increase the probability of a sudden fiscal crisis prompted by investors’ fears that the government would renege on the terms of its existing debt or that it would increase the supply of money to finance its activities or pay creditors and thereby boost inflation.

So why didn’t the CBO mention any of this before? Maybe starting back in January 2007. No, they were in on the plan.

The CBO lied about how much it will cost to ramp up of government spending until everything that can be rammed through Congress has been rammed through. Then they immediately began screaming that we have to raise taxes because the deficit is so huge. 

It’s the Democrat way. The only new wrinkle being that instead of ‘tax and spend’ we got ‘spend and then tax.’

The resulting abrupt rise in interest rates would create serious challenges for the U.S. government. For example, a 4-percentage-point across-the-board increase in interest rates would raise federal interest payments next year by about $100 billion; if those higher rates persisted, net interest costs in 2015 would be nearly double the roughly $460 billion that CBO currently projects for that year. Such an increase in rates could also precipitate a broader financial crisis because it would reduce the market value of outstanding government bonds, inflicting losses on mutual funds, pension funds, insurance companies, banks, and other holders of federal debt.

The CBO seems unaware that Congress has just enacted and Mr. Obama has just signed the (hilariously named) Dodd-Frank financial reform bill that will prevent a financial crisis from ever happening again. Or was that another lie?

Options for responding to a fiscal crisis would be limited and unattractive. The government would need to undertake some combination of three actions. One action could be changing the terms of its existing debt. This would make it difficult and costly to borrow in the future. A second action could be adopting an inflationary monetary policy by increasing the supply of money. However, this approach would have negative consequences for both the economy and future budget deficits. A third action could be implementing an austerity program of spending cuts and tax increases. Such budgetary adjustments, in the face of a fiscal crisis, would be more drastic and painful than those that would have been necessary had the adjustments come sooner…

How about we try a ‘fourth option’?

How about we vote out all the people who have voted for this insane spending and replace them with fiscally responsible representatives who will roll back the Democrat-Obama spending spree and slash government spending?

How about we insist that Congress slash taxes, which will further increase tax revenue? Just as it has every time it has been tried.

How about we return to what Mr. Obama calls “the failed policies of the past”? Which gave us “unprecedented” job creation and record growth.

The nation needs more of that kind of ‘failure.’ We can no longer afford Mr. Obama’s brand of ‘success.’

This article was posted by Steve on Wednesday, July 28th, 2010. Comments are currently closed.

9 Responses to “CBO: Deficit Will Cause ‘Financial Crisis’”

  1. Warren says:

    Did you really expect anything else from this WH and Congress (all parties)? When the financial failure comes I just hope anarchy doesn’t break out.

    • Liberals Demise says:

      Maybe a cleansing of the gene pool in Washington is what we need right about now, Warren.
      Just be prepared and aware of your surroundings.

  2. proreason says:

    Will Bush’s crimes never end?

  3. Liberals Demise says:

    Too bad no one wants to do anything to the responsible parties that brought this all upon us.
    Fannie and Freddie are the culprits and Dodd / Fwanks were the Overlords.

  4. fallingpianos says:

    How about we make all the people who voted for this insane spending personally liable for the damage they’ve caused?

    • Douglas says:

      Well, if we confiscate all the wealth of all the current and former members of house senate and presidency that will cover about less than 1% of the national debt.

      Or look at it this way. Bill Gates is worth 50 billion. The debt is currently over 13.2 trillion. It would take all of his wealth more than 260 times over to pay down the existing debt, most of the people in power (excepting a Kerry or Pelosi or two) are only millionaires.

    • Right of the People says:


      Yeah but it would be a good start don’t ya think? Better than them taking yours and mine to waste on it.

  5. proreason says:

    Scary thought.

    What if the Moron realizes that he has already crammed more than enough down the country’s throat to force the country into full-blown marxism in 5 to 10 years?

    He could pretend to be a normal American loving citizen for the next 2 years and get probably get reelected in 2012. By the 2016 he would have enough power to dissolve the government and rule like his idol Chavez.

  6. Rusty Shackleford says:

    But wait!

    All the socialists told us….I mean they TOLD us that “we were on the brink” and that the stimu-loss 1 and 2 and the carmaker “bailouts” were “absolutely essential or we “would suffer financial collapse”.

    So, what has all this spending done? Money that we don’t have, given to people who don’t deserve it, to pay for things they don’t need.

    Rhetorical question, to be sure but with unemployment floating around 10+ percent, and probably much much higher than that, what, exactly is the CBO telling us now? That the spending was “necessary”? And now to cover further spending, we have been told they want to spend more…but that crippling taxes are the ONLY way to curb the debt crisis?

    My god. In my house in order to avert a debt crisis, I stop spending.

    Again, I get so tired of uttering the word “unbelievable”. I’m just waiting for the day when the ruling class just simply tells the people “This is so because the planets were aligned just so and the tea leaves recommended it”. I mean, they might as well. Al the other “explanations” and “justifications” they spew are crap as well.

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