In a few short weeks we are going to bump up against the debt ceiling once again. In reality, the debt ceiling doesn’t really matter. Congress just keeps kicking that can down the road. In fact, focusing on the debt ceiling is just political sleight of hand that distracts from the real issue: the deficit.

Back in 2004 Treasury Secretary Paul O’Neill issued a warning that the US faced a looming fiscal crisis because of our constant and rapidly rising deficits. Then vice president Dick Cheney famously, or perhaps infamously, responded: “Deficits don’t matter”.

Strangely enough, economist Paul Krugman, hero of the far left, agrees with Cheney on this issue. Krugman writes a regular column in the New York Times called “The Conscience of a Liberal”. Here’s a quote from Krugman from the transcript of the ABC News program “This Week” with George Stephanopoulos on which he appeared, November 29th, 2009: “Important political fact, which is that whatever you would do with the deficit, the public won’t notice. In 1996, a majority of Republicans thought that the deficit had increased under Clinton, even though we had in fact been on an incredible run. So no, I mean, the deficit doesn’t matter. The economy matters. And that’s why somehow or other, Obama has got to get jobs being created.”

Krugman apparently believes that politics trumps reality and that politicians can create jobs but that is a discussion for another day. Earlier in the program Krugman was quite sanguine in acknowledging that within a decade, the US deficit would exceed 100% of GDP. In actuality, the deficit exceeded 100% of GDP this year, less than four years later after his remark. Back then the deficit was $13 trillion and 83% of GDP. Today it is over $16 trillion and 103% of GDP. This is an alarming rate of acceleration.

On one point, Krugman is right, whatever is done with the deficit, “the public won’t notice. “ That is true, until it isn’t and that moment may be close at hand. Our national deficit is a gargantuan adjustable rate mortgage with a huge balloon note. For decades we have been paying interest only and instead of paying down the principle, we keep adding to it. At some point the balloon explodes - with the potential to cause massive economic damage in its wake.

Ask the Europeans if deficits matter. The fallout from their debt crisis has been devastating. Unemployment rates have skyrocketed, particularly with regard to young people, those 25 and under, now referred to as “the lost generation”. According to Forbes Magazine the youth unemployment rate for Europe is 24%. In Greece and Spain, the countries with the worst debt crises, the youth unemployment rate is over 50%.

Here in the US, the official national debt is over $16 trillion and is accelerating, but even that is only a small fraction of the real debt. The unfunded liabilities imbedded in our entitlement programs are estimated at more than $100 trillion. If interest rates begin to rise, and they are beginning to, the deficit accelerates even faster.

If our creditors stop buying our bonds the potential economic consequences are almost unthinkable and it looks like that may be starting to happen. When you are constantly borrowing more money to make ends meet, at some point you tap out the lenders. According to a story that appeared in

Reuters last week, China and Japan have not only stopped buying US Treasuries, they are dumping them in record amounts.

That leaves “the lender of last resort”, the Federal Reserve Bank. According to economist John Williams, “the Federal Reserve’s monetization of net Treasury debt issuance for calendar-year 2013 just hit 109.5% (August 15th).” In other words, it appears that no one is willing to finance our deficits anymore and that the Fed is absorbing it all, plus bonds that others are dumping. In order to do this, the Federal Reserve is printing massive amounts of US dollars. These newly printed dollars inflate the money supply which could lead to runaway inflation or even hyper inflation.

So for those who contend that deficits don’t matter, perhaps they can explain why our creditors such as China and Japan are beginning to think that they do. If hyperinflation ensues, no will be able to explain to those who are living on fixed incomes why their standard living has plunged.

The bottom line is that deficits do matter. Current deficits are coming in under the statutory debt ceiling due to accounting gimmicks that wouldn’t be allowed under generally accepted accounting principles. By October, Congress will begin debate over the debt ceiling, while we have a debt crisis looming on the horizon.