This week the scales finally tipped. The phones began to ring and each call was roughly the same.

"What are the chances the debt ceiling won't be raised?"

"What happens if the politicians can't make a deal?"

"What will happen to my investments if the worst case scenario happens?"

Since the calls were coming in from Maine, Vermont, New York, Connecticut, Massachusetts and elsewhere, I'm sure you are all worried about the same thing. If, despite the odds, the debt ceiling is not raised by Aug. 2, 2011, the United States of America plunges into at least a technical bankruptcy. What will happen to the markets? The short answer is nothing good.

This is not an abstract issue. The dollar, as well as global stock and bond markets, would decline. The price of gold and possibly silver would jump but very few other asset classes would be immune from the carnage. The wave of selling would reverberate around the world because everyone is involved in America's bond market. The duration of this financial rout would probably be short lived, a day or three, maybe even a week, before our political "leaders" in Washington came to their senses. Personally, I believe that it would be a classic buying opportunity and one probably not seen since the week after 9/11.

A recent poll by CNBC indicated that 64 percent of viewers are blaming the Republicans for the present impasses in the debt ceiling talks. As for me, I blame us, the voters — Democrats, Republicans (especially the tea party) and independents for the present dilemma. I wrote "leaders" in quotes because the present fiasco has convinced me that there are no leaders left in Washington, D.C.

But why should that surprise you? The present blame game that is substituting for compromise among the congressmen and senators is a joke if one looks at the track record of these supposed leaders. President Barack Obama continuously reminds us that the problems started during the Bush administration. But he was elected to the Senate in 2005, just as the real excesses of mortgage-backed securities was getting under way. Joe Biden was a senator from 1972 until running for vice president in 2009. Where were they when we needed leadership and an effort to end the rampant speculation that was occurring on Wall Street?

Rep. Barney Frank was the chairman of the House Finance Committee before and during the financial crisis as was committee members Orin Hatch, John Kerry, Chuck Schumer and even Ron Paul. All these august officials were asleep at the switch despite receiving a wealth of information daily on the nation's financial system.

Rep. Rosa De Laura has been around since 1990 and sits on the House subcommittee on Labor, Health and Human Services. Steny Hoyer has been in the House since 1986 and was House majority leader from 2007-2011 and House minority whip from 2003-2007. Nancy Pelosi was the speaker of the House since 2007 and is now House minority leader; that about sums up the background of today's starting line-up on the Democratic side.

Republicans, on the other hand, beginning with our past president, presided over the financial crisis from 2000-2008. During that period, Eric Cantor, Paul Ryan, John Boehner, Mitch McConnell and many more of today's "responsible" budget-cutting GOP leaders knew and did nothing but watch as the financial system spun out of control. They too have conveniently forgotten their past lack of leadership and are busily blaming the opposing party for their own shortcomings.

Today we are looking to these same men and women to compromise, to work together and fix the economy, balance our finances, raise the debt ceiling and solve the nation's unemployment problem. We elected them, despite the knowledge that these very same people have been found wanting in the past. Why should we expect them to be any better today?

So let the chips fall where they may. I expect that until we have a deal the markets will continue their schizophrenic behavior. The best thing you can do is hunker down and wait for this storm to blow past.  

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.

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.

Here we are in the middle of June, in the third year of a presidential cycle, and no one is talking of its historical bullish implications. Despite all the present gloom and doom about the economy and the stock market, here's something to remember. There has never been a negative return in the stock market during the third year of any president's four-year term since 1939.

Sure, there could always be a first time. And if you look at the historical data and compare it to this cycle, you can understand why. Usually, the year immediately following a president's election is negative. Barak Obama's first year, however, was extremely positive. The stock market lows were put in March of that year and the S&P 500 Index gained 23.5 percent in 2009 and then another 12.8 percent last year.

Right now, all three stock market averages are roughly flat for the year after climbing as high as 8.9 percent earlier in the year. Most pundits believe we still have more downside ahead of us. How much is the question. Some strategists believe we are closer to a bottom than a top; me included. Of course, we could technically have an up year by simply gaining 1 or 2 percent from here. Yet, only once in the last 72 years has the S&P 500 closed more than 10 percent below its previous end-of-year close during a president's third year in office. On the other hand, the index has gained over 10 percent (or more) at least once during the third year on 15 out of the last 17 occurrences. We have yet to do that.

There is a political rhythm to this cycle that makes a good deal of economic sense. Initially, when a new president is elected, he makes the hard choices and absorbs any negative fallout in the economy in his first and second years. Raising taxes or cutting spending are simply two examples of a new administration "biting the bullet" early on. By year three, re-election considerations come to the forefront.

The state of the economy is usually a major determinant on who will be elected and what party will dominate the political arena. This election cycle it is already clear that the economy will be the major factor in next year's presidential election. Traditionally, the sitting president will do everything in his power (whether a lame duck or not) to insure that his party garners the most votes possible.

The problem this time around is that the Obama administration has already done everything in its power to both stimulate the economy and get people working again. The Federal Reserve Bank and its board, which is ostensibly above politics but in reality owes their positions to the sitting administration, is already doing all they can to stimulate the economy. Tactics such as reducing interest rates and other "easy money" policies are already in place and have been for two years.

I have often said that when things look the darkest, that's usually the time to pay attention to the facts and not get sucked down into an emotional morass. Although the presidential cycle is not, nor will ever be, the determining factor in whether this market finishes the year with a loss or a gain, I believe it is simply another arrow in my quiver when I say that good times lie ahead for the market and the economy this year.

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.