How might a US fiscal crisis play out?

The ideal solution to the unsustainable fiscal situation is that Congress commits to a gradual fiscal adjustment. But as that seems unlikely, the big risk is that the Fed eventually finds itself in a situation of “fiscal dominance”, with sharply rising term premia and the associated tightening of financial conditions forcing it to engage in large scale Treasury purchases. In this scenario, the necessary fiscal adjustment would mainly occur through a sustained period of above-target inflation to try to inflate away the debt. 

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