{
  "id": 10225991,
  "title": "How might a U.S. fiscal crisis unfold? Capital Economics charts the path",
  "url": "https://urgent.news/2026/09/27/how-might-a-u-s-fiscal-crisis-unfold-capital-economics-charts-the-path",
  "topic": "finance",
  "section": "Finance & Markets",
  "published": "2026-09-27T13:18:51.000Z",
  "source": {
    "name": "Investing.com",
    "slug": "investing-com",
    "url": "https://www.investing.com/news/economy-news/how-might-a-us-fiscal-crisis-unfold-capital-economics-charts-the-path-4919024"
  },
  "original_language": "en",
  "account": "A U.S. fiscal crisis, according to Capital Economics, would not emerge abruptly but instead develop as a cascading sequence of higher Treasury yields, increased borrowing expenses, weakened economic growth, and an ever-expanding debt load. The primary risk, the firm asserts, lies not in the country's capacity to repay its debt but in investors' confidence that policymakers will curb deficits.\n\nCapital Economics anticipates that U.S. nominal GDP growth will decelerate to its pre-pandemic average, while the average interest rate will rise. The federal government's primary deficits have remained larger than pre-pandemic levels, leading to a continuous upward trajectory of the debt-to-GDP ratio. The best remedy, according to the firm, is for the U.S. Congress to pledge to a gradual fiscal adjustment. However, Capital Economics concedes this is improbable, and the Federal Reserve might assume a position of fiscal dominance, where term premia surge and financial conditions tighten, compelling the Fed to buy up Treasury bills in large quantities.\n\nIn this scenario, the U.S. debt burden would primarily decrease through a prolonged period of inflation above target rates. Despite the U.S. holding the world's reserve currency and possessing an extraordinarily deep Treasury market, the global market's concern is not about the nation defaulting, but rather about the political resolve to stabilize the debt burden. If investors doubt the willingness of policymakers to restore fiscal balance, they will likely demand a higher risk premium to hold Treasuries, compensating them for the increased supply of bonds and the potential rise in yields.\n\nThe process of re-pricing could initiate a vicious cycle, with investors selling Treasuries to safeguard against future losses, driving yields higher. This, in turn, exacerbates the fiscal dynamic and triggers additional bond sales. Capital Economics highlights that factors causing interest costs to rise, unrelated to GDP growth, could lead to a fiscal crisis. When interest costs exceed a certain threshold (around 30% of revenue), the situation becomes unsustainable. A rise in interest costs above this threshold would negatively impact borrowing costs for both firms and households, particularly those with long-term mortgages that are tied to 10-year Treasury rates.\n\nHigher bond yields would also likely result in tighter financial conditions, as equity prices would decline due to the lower present value of future income streams. Consequently, households and businesses would reduce their consumption and investments, leading to further slowdown in GDP growth. As GDP growth decelerates, the debt ratio would increase, making the fiscal consolidation required to stabilize the debt even more stringent.\n\nCapital Economics believes that a long-term commitment to deficit reduction coupled with a looser monetary policy could steer the r-g dynamics in the right direction. However, the primary challenge in implementing fiscal adjustments lies in the political realm. Defense spending is difficult to reduce, and discretionary spending constitutes only a quarter of total federal spending. Consequently, raising revenue and implementing measures to achieve this goal are likely to be unpopular among voters.",
  "summary": null,
  "key_points": [],
  "editors_take": null,
  "illustration": null,
  "coverage": {
    "outlets": 1,
    "also_reported_by": []
  },
  "ai_generated": true,
  "disclaimer": "Summaries, key points and the editor’s take are written by software from other outlets’ reporting and may contain errors — always check the linked original."
}