The Financial Consequences of Fiscal Paralysis

Brief

The Financial Consequences of Fiscal Paralysis

June 23, 2004

Abstract

Almost all budget analysts believe that a financial crisis is inevitable if Social Security, Medicare, and Medicaid are not reformed. Yet, the financial community does not seem concerned. Financial markets seem to believe that programs will be reformed before a crisis occurs. The danger is that reform will not occur without a crisis. It may be a crisis without significant lasting consequences like the 1987 stock market crash or it could be something more serious. If a crisis occurs, it will most likely occur in the 2020s when reasonable budget projections have the debt passing 100% of GDP and the deficit larger than 10 percent of GDP.

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