Why US interest rates might suddenly soar

Sometimes we just don't know how good we have it.

While U.S. mortgages rates hover at less than 5 percent, in Brazil you'll face a rate of 47 percent--that's up from 41 percent last year, according to Mish's Global Economic Trend Analysis.

How does anyone pay 47 percent? And why is the rate so high?

Let's be clear: Brazil is an emerging economic powerhouse. The CIA says "Brazil's economy outweighs that of all other South American countries, and Brazil is expanding its presence in world markets."

Alternatively, central bank rates in the U.S. range from 0 percent to 0.25 percent while the rate in Brazil is 12 percent.

A major reason for high rates in Brazil concerns inflation. "The inflation rate in Brazil was last reported at 6.55 percent in May of 2011," according to Trading Economics. "From 1980 until 2010, the average inflation rate in Brazil was 445.98 percent reaching an historical high of 6821.31 percent in April of 1990." Inflation now, says the site, is around 6.55 percent.

So why do we in the U.S. care about this?

Higher interest on the way

Bluntly put, we too could soon face higher interest rates for a mortgage loan, credit cards and just about everything else.

Think about it: We have a massive trade imbalance. We have a massive deficit. We owe foreign investors trillions of dollars.

The big debate in Washington now concerns the federal deficit, whether we will raise the debt ceiling in August and what we will do to cut government spending and also raise federal revenues. It has been suggested by some that it might actually be a good idea to hold onto the debt ceiling and default on some obligations here and there. This is nuts.

Why we should pay our debts

Think about your household. You have debts but you also make your payments. The result is that you have a good credit score. With a good credit score you have low interest costs.

Now imagine that you tell the car company you won't pay any more. You'll keep the car, thank you, but no more payments. Three things will happen.

1. The car will be repossessed.
2. Your credit ranking will plummet.
3. When you borrow again--if you can borrow again in the next few years--interest rates will soar.

So, what happens if we default on the federal deficit?

Aside from annoying a very large number of people we will have to make some decisions.

The most important decisions will involve which bills to pay. As a country we will still have income flowing into the Treasury, just not enough to pay every bill so we'll have to prioritize.

The term "prioritize" is a nice expression which means we will shaft some creditors and pay others. How will we decide?

The answer is unknown because we have never considered the idea of reneging on our national debt. Most likely our choices will be determined by such measures as PAC contributions and lobbying budgets.

In the meantime, borrowing costs will soar in the U.S. as foreign investors hike demands for both interest and insurance. It won't be a great time to have an ARM or credit card debt, to get a mortgage quote or to refinance. The one thing that will save us from becoming the next Brazil and facing inflation levels above 400 percent will be the comforting knowledge that as bad as things are in the U.S., they will be much worse elsewhere.

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