Ballooning debt ensures fiscal crises.

The likelihood of a fiscal crisis increases as federal debt continues to rise in relation to GDP, because mounting federal debt could erode investors’ confidence in the government’s fiscal position and result in a sharp reduction in their valuation of Treasury securities. In turn, investors would demand higher yields to purchase Treasury securities and thus drive up interest rates on federal debt. Additionally, concerns about the U.S. government’s fiscal position could lead to a sudden increase in inflation expectations, fear of a large decrease in the value of the U.S. dollar, or a loss of confidence in the federal government’s ability to repay its debt in full, all of which would make a fiscal crisis more likely. If a fiscal crisis occurred, it would result from multiple factors, and no clear basis exists for identifying the level of debt that might lead to such a crisis in the United States.

Several characteristics of the U.S. financial system make a fiscal crisis less likely in the United States than in other countries, and financial markets do not currently reflect any notable concern about the risk of such a crisis in the United States. But given the persistently large budget deficits that are projected under current law and the already high debt-to-GDP ratio, the risk of a fiscal crisis is likely to be higher in the future if steps are not taken to stabilize the debt.