For the audio SBG-Cast, click here:

We’ve all heard the talk about the need to once again raise the Federal Debt Limit or the United States will go into default on its debt. What does this really mean and will our politicians raise the limit?

Wow, $14.5 trillion, that’s a big, really big number and that’s the number being thrown out in the request to increase the nation’s credit line. What is the real impact of this on you and me as the ultimate guarantors of this massive amount? In terms of the size of this debt it is important to note that the national income or Gross Domestic Product is also around $14 trillion. Therefore, it’s a little like saying you earn $140,000 and you carry $140,000 in total debt. For most American’s, this isn’t a huge problem. So why is it talked about all over the place as the beginning of economic Armageddon? There are four points I’d like to make that explain why this is different than the American family and their situation.

Number one, in addition to being in debt, we’re continuing to run massive deficits of over $1 trillion dollars per year. So using our example again, not only is our American family with $140,000 in income, $140,000 in debt, but they’re adding to this debt at about another $12,000 per year with no end in sight. Eventually, adding in that additional debt each year will make this an unsustainable situation.

Number two, and perhaps the most daunting problem, is what’s thought of as “unfunded liabilities”. Simply stated, when an insurance company promises to pay you a death benefit, they’re required under law to hold a certain amount of that value in liquid securities, thus ensuring their ability to pay. Or, a pension plan that looks to pay out a pension must have cash to do so. Well, if there isn’t enough cash to cover those future liabilities, or promises, it’s referred to as an “unfunded liability”. It’s not debt because you haven’t incurred it yet, but it is real nonetheless. And our two big hits there are Social Security and Medicare. Together, these pseudo insurance plans have made commitments to pay out over $60 trillion dollars over and above their reserve accounts. The only way to fund this massive number is to cut your promised benefits, or raise your contributions.

The third relevant point is that of the spending incurred in Washington that leads to this $1 trillion plus annual deficit, about 50% of it is what’s called “Mandatory spending”. What this means is that it can’t be cut! This includes Social Security, Medicare, and interest on the debt. So when our politicians talk about cutting the budget, they only have ½ of the budget to work with which is defense, foreign aid, government operations, other social programs and the other stuff. So cutting this budget is not as easy as people might think.

The fourth point is the impact of interest rates and the cause for concern. On a $14 trillion dollar debt, a 1% increase in interest rates is $140 billion dollar increase payments. Many of us remember the late 1970’s and early 1980’s when interest rates on government treasuries hovered around 15%. Well, if that happened again, moving from 1% to 15% would increase the interest payments by 14% x $140 billion or $1.9 trillion in annual interest payments. This would be more than 100% of the discretionary budget in total.

So there is real reason to be concerned about this. We must cut the budget, reduce the promises that have been made, and get our nation’s Financial Path on a journey that is sustainable. Otherwise, this one child of ours with a Visa card is going to bankrupt us too. Remember, it’s ultimately our Visa card.

Author's Bio: 

Steve Beaman is the Author of "Happiness & Prosperity in the 21st Century: The Five Paths To a Transformed Life". He has authored over 100 articles relating to the Five Paths including articles on Financial Prosperity, Emotional Wellness, Physical Health, Intellectual fulfillment, and Spiritual Security. He enjoyed a highly successful career in Economics and Finance prior to establishing The Steve Beaman Group. The "SBG" is an organization dedicated to helping people on their journey of life.