The timing of a U.S. fiscal crisis is unpredictable, but once it occurs, the speed at which things develop could be staggering.
For financial markets, at what level does U.S. debt become excessive?
The answer from Maya MacGuineas, president of the nonpartisan U.S. organization "Committee for a Responsible Federal Budget," is "no one knows." She says it will depend on what happens around the world and where investors can still put their money.
MacGuineas said on Wednesday during a discussion at the Institute for International Finance that "when you look at the U.S. fiscal situation from a structural perspective, it is clearly unsound." She pointed out that the definition of fiscal unsustainability is when debt grows faster than economic growth.
Many people in the financial market, MacGuineas said, compare the U.S. fiscal situation to a bubble. But as long as the bubble persists, there is a lot of money to be made. She also added that there is no crisis that can be predicted in terms of timing. She said:
"So, it is unwise to bet on a fiscal crisis before it begins. My assumption is that a crisis will happen at an incredible speed, a problem with a Treasury auction, and the consequences depend on people's reactions, things could develop very quickly."
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Rumors about a potential U.S. fiscal crisis are rampant on Wall Street. Earlier this week, legendary investor Paul Tudor Jones said he was concerned that the ballooning U.S. debt could face a reckoning.
MacGuineas said that even without the threat of a crisis, the level of U.S. debt is harming the economy, suppressing growth, and limiting the country's ability to help those in need. Her organization opposes massive federal deficits.
The International Monetary Fund (IMF) said in its latest report released on Wednesday that the U.S. needs to adjust its spending and borrowing, but downplayed talk of a crisis.
"This situation is sustainable," said Victor Gaspar, Director of the Fiscal Affairs Department at the IMF, at a press conference on Wednesday.He said, "U.S. policymakers can utilize a combination of various policy tools to control the trajectory of public debt, and they will do so at the appropriate time in the combination they choose."
What's worse, a fiercely competitive and deeply divided U.S. presidential campaign has experts worried.
Former Reserve Bank of India Governor and current University of Chicago Booth School of Business Finance Professor Raghuram Rajan questioned whether the increasingly divided politics in the United States mean that the country is less likely to make progress on budget deficits.
When politics lacks cohesion, both sides will only seek their voters. "So, spending increases, and revenue declines," Rajan said in another panel discussion at the Institute of International Finance (IIF).
McGinnis said in her speech that the current political environment in the United States regarding fiscal sustainability is "very bad." "Republicans want to cut taxes, Democrats want to spend," she said, adding that advocating for deficit reduction is "political suicide."
She also pointed out that the pressure to increase defense spending has been growing, which is likely to be approved by Congress.
Since the Federal Reserve cut interest rates in mid-September, the benchmark interest rate that helps finance has been rising. The soft landing scenario of the economy has been an important driving force, helping to push up the yield on 10-year U.S. Treasury bonds. But recently, there has been growing unease about what the November elections mean for deficit spending.