Right from the CBO....   
      
      
   http://cbo.gov/doc.cfm?index=11659   
      
   Federal Debt and the Risk of a Fiscal Crisis   
   July 27, 2010   
   Economic and Budget Issue Brief   
      
   Entire Document:   
   pdfSupplemental Material:   
   blog postSummary   
      
   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. The recent increase in debt has been the result of    
   three sets of factors: an imbalance between federal revenues and    
   spending that predates the recession and the recent turmoil in financial    
   markets, sharply lower revenues and elevated spending that derive    
   directly from those economic conditions, and the costs of various    
   federal policies implemented in response to the conditions.   
      
   Further increases in federal debt relative to the nation’s output (gross    
   domestic product, or GDP) almost certainly lie ahead if current policies    
   remain in place. 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.   
      
   Although deficits during or shortly after a recession generally hasten    
   economic recovery, persistent deficits and continually mounting debt    
   would have several negative economic consequences for the United States.    
   Some of those consequences would arise gradually: A growing portion of    
   people’s savings would go to purchase government debt rather than toward    
   investments in productive capital goods such as factories and computers;    
   that “crowding out” of investment would lead to lower output and incomes    
   than would otherwise occur. In addition, if the payment of interest on    
   the extra debt was financed by imposing higher marginal tax rates, those    
   rates would discourage work and saving and further reduce output. Rising    
   interest costs might also force reductions in spending on important    
   government programs. Moreover, rising debt would increasingly restrict    
   the ability of policymakers to use fiscal policy to respond to    
   unexpected challenges, such as economic downturns or international    
   crises.   
      
   Beyond those gradual consequences, a growing level of federal debt would    
   also increase the probability of a sudden fiscal crisis, during which    
   investors would lose confidence in the government’s ability to manage    
   its budget, and the government would thereby lose its ability to borrow    
   at affordable rates. It is possible that interest rates would rise    
   gradually as investors’ confidence declined, giving legislators advance    
   warning of the worsening situation and sufficient time to make policy    
   choices that could avert a crisis. But as other countries’ experiences    
   show, it is also possible that investors would lose confidence abruptly    
   and interest rates on government debt would rise sharply. The exact    
   point at which such a crisis might occur for the United States is    
   unknown, in part because the ratio of federal debt to GDP is climbing    
   into unfamiliar territory and in part because the risk of a crisis is    
   influenced by a number of other factors, including the government’s long-   
   term budget outlook, its near-term borrowing needs, and the health of    
   the economy. When fiscal crises do occur, they often happen during an    
   economic downturn, which amplifies the difficulties of adjusting fiscal    
   policy in response.   
      
   If the United States encountered a fiscal crisis, the abrupt rise in    
   interest rates would reflect 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. To restore investors’ confidence, policymakers would    
   probably need to enact spending cuts or tax increases more drastic and    
   painful than those that would have been necessary had the adjustments    
   come sooner.   
      
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