msnbc.com
As debt talks break down, clock ticks toward crisis
Day of reckoning is coming, but nobody can say when
By John W. Schoen

6/24/2011 

The breakdown of talks between the White House and congressional Republicans has intensified worries about the financial bomb known as the national debt. Without serious budget reforms, that bomb will almost certainly explode — with widespread collateral damage to the U.S. economy and the global financial system. 

But no one can say for certain just when the bomb will go off. The fuse may be longer than many people assume. 

Debt-reduction talks came grinding to a halt Thursday when Republicans pulled out, blaming Democrats for demanding tax increases rather than accepting cuts in federal services. 

The clock is ticking. The Congressional Budget Office said this week that the national debt is on pace to equal the gross domestic product within a decade, and warned of a European-style crisis unless Congress moves to realign the budget. 

“There comes a point when you have a reckoning,” said former New York Gov. George Pataki, a Republican who chairs No American Debt. “You see that in Greece. If we don’t get our house together we’ll be the next country to deal with that.” 

There’s widespread agreement among economists that without big changes that day of reckoning is coming. 

They also agree on the likely scenario when the bomb explodes. As buyers of U.S. debt get increasingly nervous about the government’s ability to make good on its IOUs, they demand higher interest rates. 

Those higher rates raise the cost for businesses to borrow for new trucks or capital equipment. Home buyers have to pay more for mortgages. Those higher rates put the brakes on the economy. 

“Rising rates also means that the government needs to pay more interest, and that in turn gets piled onto the debt,” said Mark Zandi, chief economist at Moody’s Analytics. “That makes investors more worried and they jack up rates even more. So you get into this negative feedback loop and ultimately, you have default.” 

But there’s far less agreement on just when that day of reckoning will arrive or what, exactly, creates the tipping point that sends rates spiraling higher. 

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