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.

Jay Leno took a minute on The Tonight Show to suggest that perhaps the United States shouldn’t be borrowing money it can’t pay back.

The joke may be funny, but the reality of our debt to foreign countries is far less so. China’s share of the US debt has more than doubled in the last five years, and the US Treasury recently reported that China holds $894.8 billion of government debt — about 10 percent of all our publically held debt.

Continued deficit spending leaves Americans no choice but to pay a large portion of our taxes to foreign governments, like China, Russia, Iran, and Saudi Arabia – countries who don’t have the US’ best interests in mind.

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.

Forget giving money to the Red Cross – Uncle Sam has his hand out.

On Tax Day, we mentioned countries – like Greece and the United States – asking for direct donations to pay down the national debt. In Greece, interested “investors” can wire money to a bank account set up by the government of the Hellenic Republic. The US Treasury has made the process considerably more user-friendly, setting up a one-step online donation form.

No word so far on the generosity of the Greeks, but Americans have donated a surprisingly large amount of money – $1.5 million in 2010 alone.

But while it’s pleasant to think that the kindness of strangers could eliminate our budgetary woes, the Congressional Budget Office has a huge pail of cold water to throw on that idea.

Their recent analysis of the President’s budget projected a $1.5 trillion deficit for 2010. This means that donations to the Treasury offset just .0001 percent of our deficit – the debt we accumulated in the first few minutes of the year 2010.

We can’t defeat our debt with voluntary donations, and we can’t do it with budget gimmicks either. To paraphrase James Carville: It’s the spending, stupid! Unfortunately, if Congress doesn’t get wise to this fact, voluntary donations made to the Treasury Department will have to be replaced with mandatory higher taxes paid to the IRS.

Two weeks ago, our post exposed the Texas-sized loopholes that Congress exploited in its Pay-As-You-Go (PAYGO) rules to pass laws that increase our budget deficit.

Well, they’ve done it again.

Last night, the Senate passed and the President signed a bill to extend unemployment benefits for up to 99 weeks, and to avert a pending decrease in doctors’ Medicare reimbursements.

The bill piles on another $18 billion in government borrowing, something that should have triggered PAYGO rules and forced the Senate to offset the new spending with cuts elsewhere.

But $16 billion of this new spending was defined as an “emergency” and exempt from PAYGO rules. The remaining $2 billion was let off the hook because of a Medicare loophole.

The final product still raises our national debt by $18 billion – it just does so in a way that allows the Senate to pretend like they’re following the rules.

When these PAYGO rules were first signed into law, the Defeat The Debt campaign called them “toothless” and “ineffective.” Congress is determined to prove us right.

The Senate may be able to make billions of dollars disappear on paper, but you can be sure that the money is real – after all, it’s going to come out of your taxes sooner or later.

Tax Day is April 15th. Hopefully you’ve already filed your taxes, or filed for an extension – lest you receive an unwanted visit from Uncle Sam.

Remember though, as much as you  hate writing that check to the IRS, all that tax revenue isn’t even close to covering Congress’ spending.

The federal government’s total revenue for 2009 was approximately $2.1 trillion. That’s income taxes, payroll taxes, corporate taxes – everything.

And yet, that’s also how much we spent on entitlement programs like Social Security, Medicare, Medicaid, and federal employee retirement benefits.

To pay for everything else, from the Pentagon to the space shuttle to the FBI, we had to borrow another $1.4 trillion.

We are running our country on a credit card. And just like the “minimum balance due” keeps rising when you don’t pay your own credit card bill, if our government keeps “charging” it, we’ll all shoulder painfully higher taxes needed to pay the money back.

But here’s an idea: Instead of asking us to shell out more of our salaries to pay for the government’s bloated spending, Congress could decide to spend only what they collect from us in taxes.

Living within our means? It’s a radical thought – but worth serious consideration as we approach $13 trillion in debt this April 15^th, 2010.

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.