By now we have reached our debt limit of $14.294 trillion here in the United States. As you read this, the U.S. Treasury is already shuffling bits of electronic paper around to stay current on our nation's debt payments. By Aug. 2 even this desperate farce will have come to an end.

The Obama administration's deadline is even earlier. By July 22, there must be a deal to raise the nation's debt ceiling or else there will not be enough time to ratify an agreement before the beginning of August, when Congress begins its recess. The situation is serious enough for both parties to forgo their July vacations and work for a compromise this week in steamy Washington, D.C.

A new development has the president challenging the Republicans to work out a longer-term compromise solution to the deficit right here and right now. It remains to be seen whether the GOP will accept the challenge.

The nation's debt ceiling was first established back in 1917 at a hilariously low $11.5 billion. Since 1962, it has been raised 74 times, without a problem on either side of the aisle. So why has the debt ceiling suddenly become such a contentious issue?

Politics is the short answer. The Republican Party, which passed an increase in the debt ceiling eight times during the Bush presidency, claims to have suddenly found religion when it comes to the nation's debt. And if you believe that one, you deserve to be fleeced by the shills in Washington.

The GOP is demanding $4.4 trillion be cut from the deficit over the next 10 years. They are using the ceiling to affect changes in Medicare and Medicaid spending that would probably not see the light of day in any other circumstances. The Obama administration countered with a plan that would cut $4 trillion over the same time period without changing any of the major entitlements programs. One would think that a compromise could be worked out, but as time goes by it seems as if neither side really wants a solution. As the 11th-hour approaches, opposing politicians are milking the drama for very hour of prime time they can capture.

By now just about everyone realizes there will be major fallout from failing to pass a new debt ceiling. The most obvious and immediate outcomes would be that the U.S. would technically default on its loans, our interest rates would spike, and the stock market plummet. Even if our "leaders" had a change of heart and approved a new ceiling a day later, the damage would have been done.

It would be similar if you or your household declared bankruptcy. Although you might be able to work your way back to financial health quickly, the bankruptcy would be part of your credit history for years into the future and with it would come certain costs.

Everyone from the head of the Federal Reserve and U.S. Treasury to every elder statesmen of the economy has warned of the folly of allowing the country to default. And yet a recent Gallup poll indicates that 47 percent of Americans are opposed to raising the debt ceiling while 34 percent say they don't know enough to make a decision. I suspect that most Americans mistakenly believe that raising the debt limit will automatically mean an increase in federal spending. That's not true.

Increasing spending would require authorization by Congress. In today's anti-spending environment that kind of legislation would have few backers. But failing to increase the debt limit will immediately make the debt we owe climb higher. It would force the government to suspend interest payments on the debt we already owe. Those interest payments would continue to accrue into the foreseeable future. The same would happen to you if you failed to make your minimum payment on your credit card. So your overall debt continues to rise, and quickly.

At the same time, as a result of our default, investors worldwide would demand higher and higher rates of interest to lend to a country that had already failed to pay its existing debtors on time. The fact that we might change gears later would not mitigate the actions we failed to take when they were required. The damage has been done and we would pay for it in the form of higher rates for years into the future.

I have long since lost faith in politicians. Their actions indicate that time after time they have put their own interest above the common good. So, yes, this debate makes me nervous. I don't want to see Washington once again play with our livelihoods. A U.S. default will severely impact our car loans, mortgage rates, student loans, credit cards and a whole host of personal debt liabilities. If push comes to shove, it may come down to fighting fire with fire.

The Fourteenth Amendment states:

"The validity of the public debt of the United States, authorized by law, including debts incurred for the payments of pension and bounties for services in suppressing insurrection or rebellion shall not be questioned."

If the GOP is dead set on using the threat of a U.S. bankruptcy to wheedle spending cuts (but not tax increases) from the administration, than, in my opinion, using the 14th Amendment to raise the debt ceiling without legislation is a proper and responsible alternative. God knows, I am all for spending cuts and have been for decades, but this in not the time nor the arena to force change.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

Well, we've made it through another pullback together. It seems clear to me that this week's stock market action is telling us that the worst is over — for now.

Yes, there are still a few dark clouds on the horizon. The closest one is the ongoing debate over increasing the nation's debt limit. Although I believe that in the end politicians will do the responsible thing and approve an increase, they are not beyond eleventh hour posturing. Few politicians can resist the chance to become the focus of the nation's attention by withholding their vote until all seems lost, only to relent at the last moment, thereby becoming our heroes. Disgusting? Yes, but that's what America's politics are all about these days.

As a result, expect continued volatility within the markets as te deadline approaches. The Obama administration claims we will run out the clock by July 22 while the Treasury is sticking with Aug. 2. The time it would take the Congress and Senate to ratify the debt increase accounts for the difference.

But the bias of the market, despite the volatility, will be toward the upside. It appears that investors are beginning to recognize all the positive factors that I have outlined over the past two months. Japan's economy, for example, is roaring back as indicated by very strong industrial production data this week. For readers who missed it, see my June 2 column "Japan, Is The Sun Beginning To Rise?" in which I both recommended Japan and predicted its rebirth. As it occurs, U.S. economic data will also start to strengthen. This Friday's manufacturing data, released by the Institute for Supply Management (ISM), is just a taste of what's to come. It showed the economy gaining strength for the first time in four months. Oh, and expect unemployment numbers to start dropping as well.

As you know, I have been arguing that the U.S. was in a soft patch of growth brought on by Japan's earthquake-related slowdown. Now that Japan is revving up, so will we. With Greece's problems resolved (at least until September) and oil prices heading toward $85 a barrel, Wall Street is finally waking up to what you and I have known for weeks.

Normally, after such a massive move, the markets should pull back to about the breakout level, which would be 1,300 on the S&P. It doesn't have to happen, but if it does, consider it a buying opportunity. For those of you who may have gotten cold feet during the tumultuous times of the recent past, that would be your chance to get back in.

As for the end of QE II, (see yesterday's column "The End of QE II"), all of the hyperbole you have been hearing about how interest rates would spike and the markets plunge did not materialize, nor will it. As I predicted, the demise of the Fed’s quantitative easing program is a non-event. With all these negatives removed from the market simultaneously, I expect stocks to roar. My price target for the S&P 500 remains at 1,450 or higher.

Once we get there, well, that may usher in a horse of a different color but first things first, the markets are going higher so enjoy your gains.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

Investors are worried. They are worried that the end of QE II will spell disaster. They are worried that European bank woes will spill over onto our shores. They are worried that the economy is stalling and inflation is trending higher. Yet, with all these worries, the markets have held their own over the last few weeks.

I'm not going to dismiss these concerns, although we need to remember that markets often climb a wall of worry. Admittedly, there have been so many downgrades of sovereign debt lately that it's hard to keep track. The PIGS (Portugal, Ireland, Greece, and Spain) have had to make room this week for Japan. That island nation joined the ranks of downgrades in large part due to the economic impacts of the recent earthquake and tsunami.

The governments of the PIGS countries, in the meantime, have responded by implementing austerity measures, hiking taxes and selling off state assets.

These belt-tightening policies have not had the desirable effect either in the economic or in the sociopolitical arena. Anger and fear among the population have spawned demonstrations, strikes and political upheaval.

"Just say no," has been the message of various opposition parties within the region.

The voters are listening. Spain's Socialist Party, for example, was hammered in recent elections. Ireland kicked out its prime minister, Greece's opposition parties are making it impossible for the government to make deeper austerity cuts and demonstrations have replaced dancing as a national pastime.

Although "no" sounds good, especially to the youth, it unfortunately provides little in the way of solutions to the PIGS financial crisis. But regime change (or the threat of one) has made ruling parties drag their heels in implementing reform. In the meantime, the debt continues to pile up and the financially sound countries within the EU are becoming increasingly impatient.

Readers may recall that I expressed serious doubts over a year ago when the EU first announced that in exchange for a bailout, the PIGS would need to agree to stringent spending cuts and higher taxes. My hesitation stems from a similar debt crisis I experienced in Latin America during the 1980s.

At that time, it was the International Monetary Fund (IMF) that was calling the shots. The same deal was foisted on countries throughout Latin America. All that effort accomplished was massive unemployment, a rapid decline in economic activity and a whole bunch of socialist revolutions from one end of the continent to the other. We called that period the "Lost Decade."

In the end, when the problem threatened to topple some of our own banks, we did what had to be done. We swapped debt for equity at 10 cents on the dollar. We also forgave a lot more debt than we swapped and, as a result, we have the Latin America we have today—dynamic, entrepreneurial and growing far faster than most regions. God forbid, that today's brilliant economists and politicians learn a lesson from the Lost Decade!

As for the rest of these worries, I'll handle them in order: the end of QE II at the end of June will be a nonevent. The Fed has our back and will continue to have it. Europe's woes will be contained, most likely by allowing some countries to re-negotiate their debt along the lines I have suggested. The "DD" (double dip) won’t happen this year and inflation expectations will begin to decline as investors realize the peak in the commodity bubble has come and gone.

So that leaves a market that is down less than 5 percent from its highs. Recall that I expected a pullback into the 1,300 to 1,325 range on the S&P 500 Index. Well, we dropped to 1,311 this week and in my opinion we are scraping along the bottom. So quit worrying.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

It appears Monday's low in the stock market averages concluded this last little sell off. The decline occurred, courtesy of Standard and Poor's credit agency. It reduced its outlook for U.S. Treasury bonds from neutral to negative. Since then the markets have climbed back and are now preparing to test the next level of resistance.

We can credit some stellar earnings announcements, especially in the technology sector, for the turnaround in investor sentiment. Most investors were worried that the Japanese earthquake disruptions — especially in semiconductors — would hurt high-tech companies this quarter. But the strength in demand from around the world, especially in the manufacturing sector, has more than made up for any Japanese-generated short falls.

None of this should come as a surprise to readers since I have been expecting (and writing) that global economic growth would gain momentum this year. It is one fundamental reason why I think equity markets will experience upward momentum into the summer.

"But what about the deficit, the declining dollar, inflation, oil prices?" wrote an exasperated reader, who has disagreed with my bullish calls of late.

"How can the market keep going up and up when all these negatives are out there?" he moaned, while still sitting in cash.

All of those concerns are quite real and I am not discounting any of them. See, for example, my recent column "A Shot Across Our Bow" on Standard & Poor's debt warning. It is obvious that the market is choosing to ignore these negatives for now. I'm sure investors will re-visit these worries when the time is right, but remember Maynard Keynes once said that markets can stay irrational about certain things far longer than you or I can stay solvent.

I contend that as long as the Federal Reserve continues to supply cheap money to the markets in the form of its quantitative easing operations, the markets will go up. The historical low short term interest rates that are now a fact of life are forcing more and more investors to take on riskier assets in order to get a decent return for their money.

I'm looking for a quite sizable "melt-up" in global stock markets over the next few weeks or months. I'm also expecting some new moves by China to allow their currency to strengthen in an effort to combat their soaring inflation rate. That would add further impetus to a declining dollar, which would boost our exports and add more growth to the U.S. economy. It might also turn investor's focus back on China, which has lagged world markets for some time. Stay tuned.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

Monday's surprise announcement that the outlook for U.S. debt has been downgraded reverberated around the world. Global markets shuddered. Investors rubbed their eyes as they re-read the announcement and then hit the "sell" button. Markets declined by 1 to 2 percent. Yet, by the end of the week, stocks and bonds recovered. Was this some kind of false alarm?

First the facts: the Standard & Poor's Rating Services Inc.(S&P) has reduced the outlook for U.S. debt from "stable" to "negative." It did not change its AAA rating for U.S. federal debt nor does it plan to do so anytime in the near future. But it is potentially the first step in an actual ratings downgrade. The White House had been given advance warning last Friday. Officials tried to forestall the credit agency's actions but S&P is convinced that our high debt and deficit levels are raising the possibility that the U.S. fiscal situation could become "meaningfully weaker" if the government fails to improve the country's financial health.

A barrage of spin doctors, led by Treasury Secretary Timothy Geithner, was launched on the nation's airwaves this week in an effort to assure one and all that there is no cause for alarm. It reminded me of that scene in "The Wizard of Oz" in which Toto pulls the curtain away from the Wizard revealing his fire- breathing, smoke-making, image projection machine.

"Pay no attention to that man behind the curtain," the Wizard bellows through his loud speaker system. But like Dorothy, we Americans should ignore the Wizards advice whether in Oz, or in this case, Washington.

The change in the ratings outlook, like a warning shot across the nation's bow, says to me that unless we get our house in order, and do so quickly, there will be hell to pay.

S&P recognizes that all the grand standing going on right now between the political parties is just that. They have no intention of do anything about the deficit until after the next election. Both sides are simply jockeying for position. They are using the deficit to put their presidential candidate and party in the best position to capture the election which is still two years away.

S&P's base case assumes $4 trillion to $5 trillion in deficit reduction would need to occur over the next 10 to 12 years, but it also insists that there needs to be a concrete plan in places for deficit cutting that is actually implemented by 2013. That implies a spending decline of at least 20% of U.S. GDP and an agreement prior to the next presidential elections.

What's at stake here is another Black Swan event, in my opinion. If the politicians flub this one, and our credit rating is cut, I suspect the greenback will be worth about half of its value today. Interest rates across the board in the United States will skyrocket. That will pretty much gut any hopes of a continued economic recovery and the unemployment rate, well, you get the picture.

You might wonder, therefore, why the politicians are stalling since they know the consequences as well as you and me. Taxes, a cut in spending, this year's budget, the debt ceiling – everything appears to be a political football. Politicians blithely fiddle while Rome burns because they all know the truth behind the nation's books.

Historically, politicians and their parties have very little to do with balancing the nation's budget. The most important single variable, when it comes to reducing the deficit, balancing the budget, or actually enjoying a surplus is economic growth. The stronger and longer the period of economic growth, the faster the deficit is reduced. The problem in this recovery is that due to its nature, the U.S. recovery has been anemic and therefore revenues (taxes) aren't coming in fast enough to reduce the deficit as it has in prior economic cycles.

This time around, a combination of growth and spending cuts are called for but politicians on both sides of the aisle are notorious for kicking that particular can down the corridor. The S&P is warning them that the "the can stops here."

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.