Most Americans have credit cards. And, unless you are well-connected in the credit or banking sector, each card has a credit limit, the absolute maximum the bank is willing to extend to you. But what happens if you go to the store with a maxed-out card? Simple. The cashier will give the card back and say, “I’m sorry. It says your card has reached its limit.”  Suddenly, the magic of the credit card doesn’t work anymore. Its just a piece of plastic. It used to get you anything your little heart desired. Now its good only for cleaning the cobwebs out of your heating vent.

Much like a credit card with its assigned limit, the federal debt has a limit, too. From the way politicians have been acting and talking, the so-called debt ceiling behaves more like an elevator. And yet, its a very real number. It is illegal for the government to spend more money than it can raise through debt sales. In fact, if the government does spend more, they are committing the act of counterfeiting. Now, according to CBS News, there are ways around this:

The [federal debt] ceiling was set at $12.104 trillion dollars. The latest posting by Treasury shows the National Debt at nearly $12.135 trillion.  A senior Treasury official told CBS News that the department has some “extraordinary accounting tools” it can use to give the government breathing room in the range of $150-billion when the Debt exceeds the Debt Ceiling.

Sounds like Enron and WorldCom. They also used extraordinary accounting tools. In their case, to make their thoroughly bankrupt corporations look healthy to their stockholders. Now their executives sit in prison for these crimes, while the oppressive regulations known as Sarbanes-Oxley (SOX) sit on the books unused. (Maybe Treasury Secretary Timothy Geithner should be the first to be prosecuted under SOX?) CBS News adds a bit of reality to the mix:

Were it not for those “tools,” the U.S. Government would not have the statutory authority to borrow any more money. It might block issuance of Social Security checks and require a shutdown of some parts of the federal government.

Back in the spring, we prophetically warned of Social Security’s insolvency this year, based on the declining revenue intake. Social Security checks should have stopped months ago, because the fund from which they are drawn dried up back in October. The money for seniors this last quarter, to the tune of some $155 billion, has been taken out of the “General fund” which is now dry as a bone. Thank goodness for “extraordinary accounting tools!”

Now, over at rival ABC News, they are reporting that the President has warned America will go bankrupt unless health care reform gets passed:

The President said that the costs of Medicare and Medicaid are on an unsustainable trajectory and if there is no action taken to bring them down, the federal government will go bankrupt.

The President is correct. Because its already happened: America is bankrupt. Now, the only short-term solution is to scrape together both houses of Congress and make them pass an emergency authorization to raise the ceiling and force the Treasury to auction off more bonds. And, the House raised the elevator by $290 billion on December 16th. Since they have done this several times, it may seem like the debt ceiling is just a scribble on paper, a line in the sand that can be redrawn over and over, forever and ever.

Not quite.

Just like hitting your credit limit affects your overall credit score, surpassing the federal debt ceiling is going to have a very real impact on the price of America’s debt. For the Treasury, its all about extraordinary accounting tools; for our creditors, its a symbol of insolvency. Buyers beware! Our foreign clients are not going to look at our credit score with gullible eyes, and that means, even if we magically retain our AAA credit status, the powers in international finance will look at us and see AA, A, or BBB (like Greece).

Because of this, our potential customers are going to demand some action from us. They’ll want to see us filling in the hole we’ve dug. Let’s face it: Cutting spending is out of the question. Republicans couldn’t bring themselves to do it, and Democrats are genetically incapable of stopping the spending.

Realistically, there is only one way out of this hole, and the Democrats know it. So, the year 2010 will play out like this:

• Democrats will draw up the fiscal year 2011 budget with perhaps another 15% increase in discretionary spending (more goodies for their supporters).
• They will sign stimulus packages and appropriations, and run back to their districts on the weekends campaigning on how much money they brought back to their districts.
• And, a couple of weeks after they are safely re-elected, they will vote on how to pay for the stack of bills come due.

Democrat incumbents will thank their voters for re-electing them with what? TAXES! And we’re talking the sort of taxes that have never been seen in this country. Emergency taxes, crisis taxes.  New taxes to pay for all the gifts they gave to their district. Taxes to keep America from shutting down!

It’s unavoidable. Its real. Its the only way out of impending financial disaster. The only thing that worries the Democrat incumbents is that they might have to tax us like crazy before the election.

Unless…

Unless We the People send our Democrat representatives a strong message condemning their outrageous debt addiction, make an unbreakable promise to vote them out of office next year, and work hard to elect real representatives for the people, like Boaz ItsHaky.

Bo understands a bit about financial responsibility. If his checking account goes empty, he knows he cannot write another check. If his credit card is maxed out, he cannot charge for a new Bentley. He will know just what to do when the bills come due at Congress. And its NOT taxing Americans like crazy when they’re working to climb out of a recession!

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