A government would not know it is in Insoluble Insolvency merely because its debt is very large. Under the CRE framework, the determination requires showing that there is no politically, economically, and institutionally feasible path back to long-term fiscal solvency using conventional measures.
A practical diagnostic could work as follows:
- Project the debt trajectory. Estimate debt, interest expense, revenues, primary spending, and GDP for perhaps 20–30 years under realistic assumptions.
- Calculate the fiscal adjustment required for stabilization. Determine the permanent combination of spending reductions and tax increases necessary to stop the debt-to-GDP ratio from continuing to rise.
- Apply feasible-policy limits. Ask whether that adjustment could actually be accomplished without requiring implausible taxation, politically or legally unattainable spending reductions, intolerable inflation, or sustained economic performance far outside historical experience.
- Stress-test every conventional escape route. Test higher taxes, lower spending, faster growth, financial repression, moderate inflation, asset sales, and combinations of these policies—not merely one policy at a time.
- Examine the interest-growth relationship. If the effective interest rate on government debt persistently exceeds nominal economic growth, the government generally needs increasingly large primary
