Pop quiz.

Did anyone read the news late Friday that the new housing assistance bill passed?

Did you wonder why a bill of this "significance" and "importance" was so ill-reported?

For those of us that believe and know that deficits and debts do matter, while the bill does provide some $300B in mortgage "assistance", did you notice that the national debt ceiling was raised to $10.6T?

Essentially, our recognized national debt as nearly doubled in 7 years. Let's not forget that this amount does NOT include the now explicit guarantee of Fannie and Freddie of $12T. Nor does it include the unfunded liabilities of...who really knows...but estimates run from $40T to $60T.

First, thanks to several shy but pretty creative monks many years ago, we have a double-entry method of accounting. That means nothing is created out of thin air. For every debit there is a credit. Therefore, in order for the U.S. to spend, it must first borrow, as we have a national debt, a massive and growing deficit and no reserves. This is neither a new nor a unique thought. It is fact. If this were not true, then why track the national debt - for kicks?

If we could create wealth and "money" (in any form) out of electronic bits and bites, then why not just create a million dollars for everybody in the U.S. and eliminate poverty? BECAUSE YOU CAN'T!!!

The current postulation is that as long as we create this whole transaction in our own currency, then we can create as much "money" as we like. Unfortunately, this is partially true...but...the effect would be the ultimate end-game of "Helicopter Ben" and it would create massive inflation. That would be bad enough but we continue to import things and those things will become massively more expensive as we debase our currency. The real race is to see which country can debase their currencies faster.

If we accept this as true, and I defy anyone, anywhere to challenge this statement with even a whiff of a fact, then we must consider the burden of this deficit and why it matters. Right now, our national budget is about $3T annually (not including huge amounts of "off-budget" things such as war). Of this $3T, 1/6th or $500B is interest on our debt. The debt ceiling just increased by about $1T. Interest on this additional borrowing alone will be about $40B, at our current borrowing costs. That is a huge increase in the annual deficit, a deficit that must be financed by borrowing.

Come on, folks, this has to matter to you at some point.

Look at the "what-if's. What if the U.S. incremental cost to borrow increases? The deficit and the debt increase. As the debt increased, the interest carry increases and the deficit increases. What if the FED needs to be re-financed by the Treasury? When the FED craps out on the last of the $1T or so of capital it has (and it has already committed $500-$600B), it must go to the Treasury and ask for more securities. The Treasury must then float these securities (borrow) and give them to the FED. What if we give away another stimulus package? Where do you think that money comes from? What if we need another mortgage bailout? What if the FDIC, with about $53B of capital (before the $8B it spent on IndyMac or the two bank failures this weekend) needs more capital? What if $300B just isn't enough to save the 3-5 million homes already in or expected to enter foreclosure within the next year?

Time for the comic relief of the chart above, thanks to our friends at The Sovereign Society. Banks have borrowed nearly $200B through January of 2008. Other borrowings have brought the total amount borrowed from the FED to $500-600B. The FED has taken instruments of completely unknown value and exchanged them for still relatively valuable Treasury securities. Yes, this is old news, but the national debt ceiling now exceeding $10T is new news. And it matters. Just like it matters to you when you have more debt than you can service.

The payoff of this column, since our entire BizRadio and Wall Street Shuffle teams are committed to giving you the tools to make a better financial decision, is that you should take inflation very seriously. In fact, the only treatment for the problems we have right now (notice I did not say "cure") is inflation. Bet on it, bank on it, invest accordingly. Bernanke is praying for it and he is pulling out all the stops to create it. He knows the alternative is massive deflation, and that is something no one wants or knows how to cure.

The U.S. is nothing more that than the collective earning and borrowing capacity of its citizens based upon the opinion of those that would lend to us. At some point, these numbers matter. It is at that point that we will really understand the term "defend the dollar".

The very uncomfortable reality is that our dollar is strong only as long as the world believes we will defend it. That defense could have been with a sound fiscal and monetary policy but it will depend, ultimately, upon the lenders' perception of our military strength and their perception of our willingness to use it.

Maybe that this the real reason Cheney said that "deficits don't matter". I respectfully disagree.