C --- that Causes a global financial crisis that escalates, results in sky-rocketing interest rates, causes massive U.S. Budgets cuts and Tax increases

(Rudolph, Phd in economics from the Johns Hopkins University, Institute fellow at the Urban Institute, frmr assistant director for economic policy at the Office of Management and Budget, “A U.S. FISCAL CRISIS?,” pg online @ https://www.urban.org/sites/default/files/publication/99224/a_u.s._fiscal_crisis.pdf //um-ef)

A fiscal crisis occurs when financial markets first recognize that a country may no longer be able repay its debts. At that point financial markets become extremely unstable and interest rates rise quickly by substantial amounts. If that happens in the United States, the turmoil is likely to spread around the world because of the relative importance of American financial markets. The definition of a crisis used in this paper includes instances in which no default occurs, but in which countries experience sudden major increases in interest rates and/or plunging exchange rates because financial markets expect a default to be imminent. The resulting financial instability may induce a country to undertake dramatic budget reforms quickly to stave off actual default. Since World War II, actual defaults have been frequent in emerging markets, but developed countries on the verge of default have typically been able to enact reforms that enabled them to step back from the brink. Sweden in the early 1990s, Canada in the mid1990s, and Ireland early this century are examples where defaults were prevented just in time. A fiscal crisis does not have to be combined with an actual default to be extremely painful. Severe cuts in programs and tax increases are likely to be necessary whenever a country has been fiscally irresponsible. Reinhardt and Rogoff note that the decision to default is a political decision. It generally occurs at debtGDP ratios considerably lower than now experienced in the United States. Politicians recognize that the shock resulting from an actual default grows with the size of the debt. Moreover, every day’s delay means that corrective actions become ever more painful. Auerbach, Gale, and Krupkin (2018) have made an estimate of something called the fiscal gap for the United States. It is the size of the tax increase or noninterest spending cut relative to GDP necessary to ensure that the debt-GDP ratio at some future date hits some prudent target. In one scenario, they estimated the immediate change in spending or tax burdens necessary to achieve a debt-GDP ratio in 2048 equal to today’s. The estimated fiscal gap is 4 percent of GDP. That is equivalent to a 21 percent cut in noninterest spending or a 24 percent increase in tax burdens. If the adjustment is put off to 2021 the fiscal gap rises to almost 4-1/2 percent and if the adjustment is delayed to 2025 the gap becomes 5.2 percent.