What happens if Congress doesn't rein in national debt?
With the national debt at 90% of gross domestic product, the US could face a crisis if creditors raise interest rates, experts say.
What happens if Congress does not rein in the record $14.2 trillion national debt?
A “crash landing,” cautions one business think tank. “If the US does not put its fiscal house in order, the reckoning will be sure and the devastation severe," said Eriskine Bowles and former Sen. Alan Simpson, cochairs of the president's deficit commission at a Senate Budget Committee hearing Tuesday. The country is "headed for the cliff," said Sen. Kent Conrad (D) of North Dakota, chairman of the Senate Budget Committee at the hearing.
The budget panel's top Republican, Sen. Jeff Sessions of Alabama, speaks with equal urgency. The debt problem "runs the risk of a cataclysmic event, and it can happen very quickly,... just like it did in Greece."
What's a 'cataclysmic event' look like?
The trigger could be something simple, such as the US Treasury offers bonds for sale but there aren't enough buyers. Last year, the Treasury sold $8.4 trillion in securities at relatively low interest rates. But if bidders ever shy away, those rates have to rise. The United States, in effect, would need to pay creditors more to borrow from them. Because of the nation's skyrocketing debt base, the cost of a big rate increase could be ruinous.
"The simplest way is to put it in human terms: Your creditors decide that they don't trust you anymore. Your credit-card rate goes up to 29.999 percent per year," says Joseph Minarik of the Committee for Economic Development, the aforementioned business think tank. "In national terms, the question is: What if the Treasury threw an auction and nobody came?"
The danger point is reached when gross national debt equals 90 percent of annual gross national product, say economists Carmen Reinhart and Kenneth Rogoff, who studied the experience of 44 countries through 200 years. Their book, "This Time Is Different: Eight Centuries of Financial Folly," has become a reference work for lawmakers in both parties – many of whom note the US crossed that threshold for the first time this year. (Gross national debt is debt held by the public plus money the US government owes to itself, such as commitments to fund Social Security and Medicare.)
Hitting that debt level probably does not endanger US solvency, but it may well tamp down economic growth, says Ms. Reinhart. Countries where debt levels have jumped above 90 percent of their GDPs have median growth rates that are 1 percent lower than countries with lower debt levels. "So there is reason to be concerned about a debt overhang, even if we don't have a full-fledged blowout under our nose," she says.
When might the 'cataclysm' happen?
It's impossible to know, but it has happened to countries whose debt, relative to the size of their economies, is less than that of the US.
"The cataclysmic event," says senior fellow Alice Rivlin at the Brookings Institution in Washington, "is the perception that we're not a creditworthy partner.... At some point – and it seems likely to be very soon – our creditors will begin to worry that we're not credit-worthy, they will demand a higher price, and interest rates will go up."