This week, our national debt is projected to pass $13 trillion (Want to know how big a trillion dollars is? Click here).

It’s a timely week for the debt to have its Bar Mitzvah, because there’s a debate raging anew about the health care law and whether it actually reduces the federal budget deficit. The public is still having difficulty squaring the circle where $2.3 trillion in new spending helps reduce our $13 trillion debt.

But it’s an important question to answer – perhaps the most important question to answer. As recently as this week, rating agencies like Moody’s have warned that the trajectory of our debt has us on course for a downgrade in our bond rating.  If that happens, the interest rates we pay will rise, which means higher taxes to service the debt, along with more expensive mortgages and bigger credit card bills.

So there’s good reason to be concerned about government health care and the debt.

The Congressional Budget Office (CBO), analyzing the new health care law, projected deficit reduction in the order of $120 billion over the next decade. As CBO director Doug Elmendorf pointed out, however, these projections were only as good as Congress’ word. A mere two months later, Congress is already poised to break it.

If a planned 21 percent decrease in Medicare doctors’ reimbursements doesn’t take place, then the CBO estimates about the health care bill and deficit reduction aren’t worth the paper they’re printed on. And the American Jobs and Closing Tax Loopholes Act (HR 4213) – expected on both the House and the Senate floors this week – will delay that spending cut until 2013, at a cost to taxpayers of $64 billion.

Since this is an adjustment to policy that’s already in place (Gimmick Alert!), Congress doesn’t have to account for this spending under its Pay-As-You-Go rules.

Congress isn’t even living paycheck-to-paycheck; they’re borrowing money at a record-breaking pace. Our lenders remain willing to finance our spending today, but we are utterly dependent on their continued confidence. And the day international investors decide that the US is headed for a Greek-style financial crisis, they’ll be right.

What would you do if the monthly payment on your home mortgage jumped from $1,100 a month one year to over $1,400 the next? Keep this in mind when you hear prominent economists and opinion makers talk about higher interest rates as a consequence of our $13 trillion debt.

If we continue to accumulate debt, those who lend us money—both American investors, as well as foreign countries like China and Saudi Arabia—will demand higher interest rates to compensate for the greater risk of loaning money to the US.

But don’t be fooled into thinking that higher interest rates only affect power-players in New York City and Washington, DC. Anyone that holds a home mortgage, a student loan, or even a small credit card balance will be affected by this, because the size of your monthly payments is directly impacted by the interest rate.

Here’s how: Imagine you’re purchasing your first home with a mortgage for $200,000. Your interest rate is 5 percent this year, but it adjusts upward after the first few years. That 5 percent interest rate is “indexed,” often to the interest rate on Treasury securities – the federal government’s debt. This means that the interest rate on your mortgage rises and falls with the interest rate on government bonds.

At 5 percent interest, your mortgage payment is reasonable — just under $1,100 a month.

However, while you’re enjoying that new house, Congress is spending its way to an additional $1.4 trillion in debt. That’s on top of the $13 trillion we already owe. When our lenders demand higher interest rates in response, and the rate on your mortgage jumps to 8 percent, your future payments would look a lot different.

At 8 percent, your payments would increase by $330; if the rate jumps again, to 12 percent, you’d be paying an additional $560 (Think that’s impossible? Remember – in 1981, the yearly interest on a fixed rate 30-year mortgage was over 18 percent!)

Not only will the payments go through the roof, but over the life of the loan—let’s say 30 years—the total cost of your $200,000 house at a steady 5% is about $386,000. That’s not chump change – but on a mortgage where the rate rises to 10% you’d be paying $541,000. That’s $155,000 more – almost enough to buy another house!

Keep this in mind the next time you see a debt clock that features your share of the national debt. The debt is very real, and the consequences of doing nothing – like higher interest rates – will have an impact on all us.

Image courtesy of swisscan.

The US government has a long history of promising more than it can afford to spend. As you can see in the graph above, in all but four of the last thirty years, our government has spent more money than it’s received in taxes. In this, we’re not unique – many other countries have been piling on national debts of their own.

But in the last two weeks, a few of our debt-ridden brethren started to fight back:

• First, Greece enacted a fiscal austerity package that included substantial cuts to public sector salaries and pensions. As you might have heard, civil servants in Greece didn’t take the news lightly. Instead, they rioted in the streets, setting cars on fire and throwing Molotov cocktails at police.

• Then, Spain’s socialist government announced a five percent public-sector pay cut of its own, after the budget-watchers at Moody’s warned that they’d be keeping a close eye on debt-ridden Euro-zone countries.

• Finally, this week, incoming British Prime Minister David Cameron declared that large bonus payments would only be made to civil servant who exceeded expectations, and established a separate commission to limit compensation for top government executives.

Though cutting the pay of public sector workers isn’t a panacea, it’s significant because it recognizes the disconnect between spending that’s been promised – either to public employees, or taxpayers in general – and what’s actually available in the government’s checkbook.

Washington still doesn’t get this. The national debt is approaching $13 trillion, and as our debt builds, so do our interest payments. By 2018, close to one-fifth of the money the government brings in will be consumed by our $755 billion interest payment. That’s a big problem, and not just because Congress will have to raise your taxes to pay the bill.

Moody’s – the same agency that spooked Spain into cutting public sector salaries – considers interest payments that large to be in bond downgrade territory. If Treasury bonds are downgraded, interest rates will rise, which means that everyone – from students, to homeowners, to casual credit card users – will see their monthly bills increase.

The good news is that projected future spending is still just that – a projection. Congress can follow the lead of countries like Spain, and preemptively make unpopular decisions to rein in promised spending; or, they can follow the lead of Greece, and have those decisions forced upon us.

Image courtesy of Patrick Q.

Last week, the green eyeshades at Moody’s warned Spain that their stellar AAA credit ranking was at risk, citing the country’s difficulty in meeting deficit reduction targets. Spain’s spooked creditors responded by demanding higher interest rates to hold the country’s bonds.

These interest rates are bad news, and not just because Spain’s minimum monthly payment on their national credit card just got a bit bigger. It also means the Spanish could soon see their mortgage payments and credit card bills rise (click here to find out how).

Unfortunately, a new report from the Congressional Budget Office (CBO) shows that the United States is on track for a similar outcome.

Moody’s has drawn a “line in the sand” for advanced countries with large debt loads; interest payments on their debt can’t exceed 18 percent of all the money they’re bringing in through taxes. You cross the line, and you risk a downgrade – it’s as simple as that.

CBO projects that the United States will cross that line in eight years.

Unfortunately, if we don’t get our fiscal house in order, that first bond downgrade won’t be our last.  As the graph of CBO data above shows, over the next 70 years our public debt is projected to skyrocket to more than 800 percent of the country’s economic output – that’s $561 trillion (you can find out how big a trillion is here).

Continued debt accumulation in the coming decades means higher taxes, and higher interest rates that drive up the cost for all of us to borrow money.  Unless you expect to check out from planet Earth within the next ten years, you should be frightened. We are on course not only to destroy your family’s finances, but also to destroy our country’s.

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So, what lies behind this astronomical growth in the national debt? Entitlement spending. Reining it in is the only solution. Unfortunately, the CBO says that Congress’ new health care law won’t fix this problem; many economists believe that it will make the problem worse.

As one chair of the President’s deficit commission recently made clear, defeating the debt will require difficult and substantial entitlement spending cuts. Unless we want to end up on the wrong end of a Moody’s report, Congress must act soon.

The good news this morning from the Commerce Department is that the country’s economy grew an estimated 3.2 percent in the first three months of 2010. Our gross domestic product (GDP) — the value of all goods and services produced by an economy — has grown to $14.6 trillion.

Here’s the bad news. While our GDP was rising, our national debt was rising as well —from $12.3 trillion at the end of December 2009 to almost $12.8 trillion at the end of March 2010.

Our national debt is now equal to more than 87 percent of the country’s GDP.

The significance of this figure was highlighted earlier this year by economists Ken Rogoff and Carmen Reinhart. At debt-to-GDP levels above 90 percent, these economists found that a country’s economic growth slows down compared to other countries with less debt.

This means we’re making fewer cars, buying fewer computers, trading with fewer countries, investing fewer dollars, etc. But this isn’t just an abstract problem—it affects all of us, because it means there are fewer jobs, fewer paychecks, and less prosperity to go around.

It’s likely we’ll cross the 90 percent threshold well before the end of 2010. In fact, with over two million dollars in debt accumulating every minute, we may be there by summer.

While the exact reason for a link between economic growth and the 90 percent debt threshold is unclear, one thing is certain — as the national debt gets bigger, even the additional tax revenue the comes in when the economy starts to grow won’t be enough to save us.

The chair of the President’s debt commission has already acknowledged this — which means the commission had better try to do more than just send “a good message” about debt reduction.

If Congress doesn’t take action, the only message we’ll be receiving is one from our lenders, forcing us to raise everyone’s taxes to handle the increased cost to borrow money.

On the floor of the House of Representatives in September of 2009, U.S. Representative Frank Wolf (R-Virginia, 10th District) challenged Congress and the President to deal with the growing national debt. He urged Americans to “visit DefeatTheDebt.com and learn about exactly how serious the mounting debt and deficits are to every American. […] When will it take us to get serious enough to deal with it?”

We usually speak of budget deficit in terms of year: In 2009, our country ran a $1.4 trillion deficit, and in 2010, the Congressional Budget Office (CBO) projects that we’ll run a $1.5 trillion deficit.

But these budget deficits don’t materialize all at once; rather, they accrue as the federal government spends more money than it takes in, month after month after month.

The CBO keeps track of the federal budget deficit in its “Monthly Budget Review”. As a new feature here on the Defeat The Debt Notes page, we’ll be posting a graphical version of the budget review every month following its release. This way, we can see our country’s “progress” – if we can really call it that – toward the $1.5 trillion deficit for 2010 as it accumulates throughout the year.

Our federal budget is going in the wrong direction – quickly – and it’s crucial to understand that by spending more money than we have each month, we’re making the problem much, much worse.

Paul Volcker, currently the chair of the President’s Economic Recovery Advisory Board, commented last night that higher taxes or a value-added tax would likely be necessary to bring down the country’s rising budget deficit.

In 1985, Volcker felt differently about this issue; he said it was more important to address the deficit by cutting government spending, not increasing taxes – because those new taxes could hurt the economy.

Whether Volcker had a change of heart, or last night’s comment reflected the Administration’s opinion more than his, it indicates how drastically our country’s fiscal state has deteriorated since 1985.

If Congress’ spending habits don’t change immediately, the crushing new tax burden that Volcker spoke about will surely come to pass. To keep budget deficits under control and maintain current policy, taxes would have to be increased on all Americans, not just the wealthy. One estimate has middle class tax rates rising 48 percent between now and 2019 to meet a 2 percent of GDP deficit target.

But these tax hikes are not inevitable.

We need an end to the charade in Washington, where elected officials one day support costly legislation that isn’t paid for, and then use lofty rhetoric about reducing our debt the next day. To rein in our debt, we don’t need a complex new scheme to send more tax dollars to big spenders in Washington.

Congress just needs to stop spending money we don’t have.

Visit DefeatTheDebt.com to learn more about the Value-Added Tax.