Debt: The U.S. Is on the Edge of a Cliff

Is the U.S. approaching a tipping point with global investors? That was a natural question to ask on Feb. 1 after President Barack Obama released a federal budget that envisions big deficits out to 2020, adding to the government's already enormous pile of liabilities. Big debts aren't a new problem, of course. And so far, despite offering near-record-low interest rates, the U.S. government has had no problem finding buyers for its Treasury bills, notes, and bonds. But with total federal debt projected to equal the size of America's annual gross domestic product by fiscal 2011 or 2012, many economists worry that investors could suddenly lose confidence in the U.S., demanding higher interest rates to reward them for the risk they're taking.

As Greece is discovering to its chagrin, a loss of investors' confidence can quickly spin out of control. If the U.S. has to pay higher rates to finance its borrowing, its total interest payments will shoot up. At that point, the government will either have to cut spending and raise taxes or take out new loans to cover the interest on the old ones. The first solution is politically unpopular and the second is lethal to market confidence. If creditors conclude the U.S. doesn't have the political will to get its deficit spending under control, they may well panic, driving rates even higher, pushing up interest payments further, and so on in a vicious and dangerous cycle.