The Long-Term Budget Outlook CBO Report

Congressional Budget Office (CBO):
The Long-Term Budget Outlook
CBO Report

The CBO opens with a chart predicting the most dramatic surge in government debt of all time.

It shows that even in proportion to the larger size of the U.S. economy today, the government debt has ALREADY surpassed the massive debt loads accumulated during World War I and the Great Depression ... and will soon surpass even the massive debt load of World War II.

"Large budget deficits," write the authors of the CBO report, would ...

* "Reduce national saving," leading to ...

* "More borrowing from abroad" and ...

* "Less domestic investment," which in turn would ...

* "Depress income growth in the United States," and ...

* "Seriously harm the economy."

Worse, on page 14, the CBO warns that:

* "Lenders may become concerned about the financial solvency of the government and ...

* "Demand higher interest rates to compensate for the increasing riskiness of holding government debt." Plus ...

* "Both foreign and domestic lenders may not provide enough funds for the government to meet its obligations."

The magnitude of the problem cannot be underestimated. The CBO declares on page 15 that:

* "The systematic widening of budget shortfalls projected under CBO's long-term scenarios has never been observed in U.S. history" and ...

* It will also be larger than the debt accumulations of any other industrialized nation in the post-World War II period, including Belgium and Italy, the two worst cases of all.

But the CBO admits that even these frightening projections may be grossly understated because:

* "The analysis omitted the pressures that a rising ratio of debt to GDP would have on real interest rates and economic growth."

* "The growth of debt would lead to a vicious cycle in which the government had to issue ever-larger amounts of debt in order to pay ever-higher interest charges."

* "More government borrowing would drain the nation's pool of savings, reducing investment" and ...

* "Capital would probably flee the United States, further reducing investment."

But none of these are factored into the analysis. On page 17 of its report, the CBO writes ...

"The analysis ... does not incorporate the financial markets' reactions to a fiscal crisis and the actions that the government would adopt to resolve such a crisis. Because [our] textbook growth model is not forward-looking, the analysis assumes that people will not anticipate the sustainability issues facing the federal budget; as a result, the model predicts only a gradual change in the economy as federal debt rises.

"In actuality, the economic effects of rapidly growing debt would probably be much more disorderly as investors' confidence in the nation's fiscal solvency began to erode. If foreign investors anticipated an economic crisis, they might significantly reduce their purchases of U.S. securities, causing the exchange value of the dollar to plunge, interest rates to climb, and consumer prices to shoot up.

http://www.cbo.gov/ftpdocs/102xx/doc10297/06-25-LTBO.pdf