Avoiding the Credit Cliff

[Geee]

National Review:


The shadow of an oncoming debt crisis is hindering job growth today and threatening our fiscal and economic future. The latest warning came today from “The Long-Term Budget Outlook,” an annual report from the Congressional Budget Office (CBO) which details the state of the nation’s finances. This year’s news is grim. We are on the verge of leaving the next generation with an unsustainable debt burden and a less prosperous nation.

According to economists Kenneth Rogoff and Carmen Reinhart, who have studied sovereign debt extensively, debt-to-GDP ratios of over 90 percent are associated with lower economic growth and increased risk of a severe debt crisis. According to the CBO, total U.S. debt will race across that tipping point and surpass 100 percent of the economy by the end of this year.

President Obama has asked Congress to raise the statutory debt ceiling, which sets a legal limit on federal borrowing. But this debt ceiling should not be confused with the bigger threat — a credit cliff, beyond which global confidence in the U.S. government would enter into a freefall.
The CBO’s warning on this point is clear: “Growing debt . . . would 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.” We are rapidly approaching the cliff’s edge, and there are three main reasons that a course correction cannot be delayed.