Federal Debt & Fiscal Crisis: The CBO View

In a recent series of posts I commented on implication of the federal debt with respect to inflation, a debt crisis, and higher taxes.  Now the Congressional Budget Office has weighed in with an analysis of the risk of a debt crisis.  The key lesson that I had not mentioned: a debt crisis can sneak up and catch you by surprise.  A country may enjoy low interest rates when it goes to market with a new issue of bonds, then suddenly see appetite for the next series of bonds dry up.  It can happen in days, and then investors start dumping old bonds, further aggravating the crisis.

The CBO also emphasizes that debt crises most often occur during recessions, so fiscal austerity (cutting spending and raising taxes) comes at a difficult time.