see paper for full content

https://www.crfb.org/sites/default/files/media/documents/What Would a Fiscal Crisis Look Like_3.pdf

In this paper, we discuss and illustrate what a fiscal crisis might look like. The crisis types we survey – several of which could happen simultaneously – include:

Financial Crisis: Reduced confidence in U.S. Treasury markets could lead to a spike in interest rates, panic among traders, devaluation of assets, freezing or slowing of credit, and failure of key financial institutions. Inflation Crisis: Attempts or fear of attempts to manage debt levels through monetization, artificially low interest rates, or financial repression could result in high and potentially spiraling inflation. Austerity Crisis: Sharp tax increases and spending cuts enacted to stave off a fiscal crisis could create undue hardship, undermine demand, and push the economy into recession. Currency Crisis: The U.S. dollar could face sudden and significant depreciation in response to fiscal stress and policy responses, resulting in destabilization of markets and the economy. Default Crisis: Policymakers could explicitly or implicitly default on debt, including by failing to make debt payments or by restructuring existing debt. Gradual Crisis: Living standards and fiscal and monetary flexibility could gradually erode in response to rising debt, potentially causing as much or more long-term damage than an acute crisis. A fiscal crisis can be sparked by a variety of factors (see Box 3). Although the chances of a major fiscal crisis in the United States remain low in the near term, the likelihood and potential severity of a crisis rises with higher debt. Lawmakers would be wise to put the nation’s fiscal house in order to avoid any such crisis.