Debt crisis ahead?

By Sara Wyant

© Copyright Agri-Pulse Communications, Inc.

WASHINGTON, March 28 - As Congress returns this week to iron out differences over funding the federal government for 2011, budget experts are warning that failure to address the growing federal deficit over the long term could produce dire consequences.

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“We could definitely have what's called a sovereign debt crisis,” explained Alice Rivlin during CNN's “State of the Union” on Sunday. Rivlin, a senior fellow at the Brookings Institution who served in the Clinton Administration as White House Budget Director, appeared with Douglas Holtz-Eaken, president of DHE Consulting, LLC and a former Director of the Congressional Budget Office from 2003-2005.

Projections as a percentage of GDP. Source: Congressional Budget Office.


“We used to think that only happened to small countries on other continents, but it could happen to us as well,” added Rivlin. “That means that we would not be perceived as able to get our act together and pay our debts and our creditors would lose confidence in us.”

“When that happens, things go south very fast,” she said.

Holtz-Eaken said the current budget process, where lawmakers fund the government under a continuing resolution (CR) for two or three weeks at a time actually creates two pieces of bad news: it makes it impossible for agencies to manage effectively and provides a distraction from the bigger issue of debt reduction.

Asked by CNN host Candy Crowley how the debt crisis impacts average citizens, Holt-Eaken said we could see a variety of impacts that will stagnate the economy. For example, interest rates could creep up, making purchases more expensive.

“The place you work can't invest like they want or make decisions on hiring,” he added.

Rivlin emphasized that action is needed sooner, rather than later.

“We're moving into a period when we will have debt rising rapidly because of the retirement of the baby boom generation and high medical care costs,” Rivlin said. “And we've got to do something about that. It's got to be bipartisan, and we've got to do it soon so that we reassure our world creditors that we're on the job.”

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