Republicans and Democrats are butting heads as they try to negotiate a solution the debt ceiling deadline coming up in early August. This political brawl is, of course, a reflection of the need to deal with the national debt and get the finances of the federal government in order.

The Simple Problem

The fact the United States has run up against the debt ceiling is a reflection of the problems with our overall debt situation. The problem involves simple math. The government is spending far more than it takes in. The government is taking in roughly 2.7 trillion dollars this year, but has a deficit of 1.5 trillion. This effectively means that another 1.5 trillion is being added to the overall debt this year and this will occur for the foreseeable future.

Three Areas Problematic

This is one area where it is easy to tell whether our elected representatives are serious about dealing with the problem or not. This is because there are three programs that are the problem. If we terminated every other government program, these three would still cost us much more than we bring in as tax revenue each year. The three programs are Social Security, Medicare and the military. Unless our elected representatives are willing to address the tough issues with these three programs, any other steps they take are useless.

Playing With Fire

The simple fact is Republicans and Democrats are playing with fire in the debt ceiling negotiations. The Republicans are refusing to go along with any solution that involves raising taxes. The Democrats are refusing to go along with any solution that doesn't combine spending cuts with tax increases. Somebody is going to have to blink, but it appears more and more like neither side is willing to.

So, what would be the impact of no deal? The immediate answer might surprise you. The government would start suspending payments to pensions and would direct the money to pay the treasury notes coming due. There would be no default per se, but this is only a temporary solution that would last for perhaps six months before the debt had to be dealt with in earnest.

This doesn't mean problems would not happen. They would in a big way. The monitoring agencies have already indicated they will heavily downgrade the credit rating of the United States. This would result in a huge increase in interest rates on government debt, which would leak into the commercial market. This would mean the interest rate on all adjustable rate loans for cars, homes, credit cards and the like would go up, way up. We are talking about increases in the range of two to five points. Such an increase would bankrupt most of America so it behooves the politicians in Washington, D.C., to come up with a solution.

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