Monday, November 08, 2010
Martin Sullivan's Part 2 on the approaching U.S. fiscal crisis
This one bears the cheery title, "Fiscal Crisis, Part 2: Catastrophe." Among the points he mentions (from the Len Burman paper I linked here recently, among others) is that, once U.S. debt levels get high enough, rising interest rates for U.S. borrowing (whether triggered by default worries or otherwise) can create a runaway, self-reinforcing cycle that leads to default. Increasing the interest rate makes funding the debt costlier and harder to afford, which requires raising the interest rate, which makes funding the debt costlier and harder to afford, etcetera.