The growing mountain of US debt, graphically illustrated

On a visit to Romania two years ago a Christian dentist explained to me how the world economic system worked.

‘It’s like this,’ he said.

‘The average American earns $20 an hour and spends $25 an hour.'

'The average Chinese man earns $5 an hour and spends $4 an hour and lends the other dollar to the American.’

‘Because there are about five times as many Chinese men as Americans the sums work out pretty well.’

‘The only problem though is that both American and Chinese man are doing the same job and it is a global market.'

'So what will happen in time is that wages in America will come down and those in China will go up and when that happens there will be an awful lot of kicking and screaming in the US and possibly something even worse.’

I haven’t checked his sums but I thought his comments were rather insightful and the general gist is chillingly correct.

We all know that US debt is spiralling out of control, but all we get from the media is a moment by moment commentary but without the big picture.

So the Telegraph tells us today that Washington is due to hit its borrowing limit on 17 October, at which point the US government runs out of ‘extraordinary measures’ to raise new cash to pay its bills, risking an unprecedented default on US sovereign debt.

We are warned that markets are therefore braced for a choppy week because US politicians failed to strike an agreement on raising the debt ceiling over the weekend, leaving it just days away from hitting its $16.7 trillion (£10.3 trillion) borrowing limit.

Jim Yong Kim, President of the World Bank, on Saturday has warned that the US is just ‘five days away from a very dangerous moment’ unless politicians produce a plan to avoid default.

Christine Lagarde, President of the IMF, meanwhile repeated her warning that failure to raise the US borrowing limit would lead to ‘massive disruption the world over’. 

But let’s put the daily headlines aside and look at the big picture.

By raising the debt ceiling even further the US will be moving even more into unprecedented debt.

Since 2001 the debt limit has been raised 14 times for a total of $10.7 trillion to its present level of $16.7 trillion (see above).

It also stands at around 100% of GDP, the highest level since the Second World War (see right).

So who is this debt owed to? (see below)

Over half of the debt is publicly owned within the US or is tied up in Social Security Trust Funds.

Over 30% is owed abroad with China (8%) and Japan (6%) being the biggest creditors.

When I was a boy my father taught me to live simply, give generously, save for future necessities and never to go into debt. It has served me well.

St Paul told the church in Rome to ‘Let no debt remain outstanding, except the continuing debt to love one another.’ (Romans 13:8)

Jesus was even more radical, ‘Give, and it will be given to you. A good measure, pressed down, shaken together and running over, will be poured into your lap. For with the measure you use, it will be measured to you.’ (Luke 6:38)

Why is it I wonder that the richest nation on earth is also the most indebted and lurching from one financial crisis to another?

I suspect the answer is found in another Bible book, ‘Human desires are like the world of the dead - there is always room for more.’ (Proverbs 27:20)

However high your income is, if your expenditure is greater you are heading eventually for a fiscal cliff without a happy landing. 

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Why the US 'fiscal cliff' bill fails to address the economy's real underlying problems

The US fell off the ‘Fiscal cliff’ at midnight on 31 December with tax rises of about $536bn and spending cuts of $109bn from domestic and military programmes coming into force.

But the Democrat-controlled Senate (upper house) then passed emergency legislation at 2.07am on New Year's day by 89-8 to cut taxes back for households making less than $450,000 (£277,000). This measure has now been passed, 21 hours later, by the Republican-controlled House of Representatives with a margin of 257-167. This move effectively increases taxation for the very rich whilst maintaining government spending and involves both sides giving considerable ground.

However, this frantically-drafted compromise only delays deep spending cuts by two months, meaning Republicans and Democrats are likely to face a new crisis at the end of February by which time the US is due to hit its 'debt ceiling' of $16 trillion (the debt ceiling is the amount of money the government can legally borrow to service its debt - see graph above).

The debt ceiling was most recently raised on January 30, 2012, to a new high of $16.394 trillion. At the end of 2012 it already stood at $16.351 trillion (see debt clock here).

The estimated population of the United States is 315 million so each citizen's share of this debt is about $52,000. The National Debt has continued to increase an average of $3.8 billion per day since September 28, 2007! (see chart right)

The United States public debt is the money borrowed by the federal government of the United States through the issue of securities by the Treasury and other federal government agencies. US public debt consists of two components:

1. Debt held by the public including treasury securities held by individuals, corporations, the Federal Reserve System and foreign, state and local governments (currently about $11 trillion)

2.Debt held by government accounts or intragovernmental debt includes non-marketable Treasury securities held in accounts administered by the federal government that are owed to program beneficiaries, such as the Social Security Trust Fund (currently about $5 trillion)

Public debt increases or decreases as a result of the annual unified budget deficit or surplus. The federal government budget deficit or surplus is the difference between government receipts and spending.

Historically, the US public debt as a percentage of GDP increased during wars and recessions, and subsequently declined. For example, debt held by the public as a share of GDP peaked just after World War II (113% of GDP in 1945), but then fell over the following 30 years (see graph below).

In recent decades, however, large budget deficits and the resulting increases in debt have led to concern about the long-term sustainability of the federal government's fiscal policies and neither Republicans nor Democrats have seemed able to control it. Now they are caught between the devil and the deep blue sea – do they increase taxes risking national unrest, stifling growth and pushing the country back into recession, or do they decrease welfare spending and risk pushing hundreds of thousands over the poverty line?

At the end of 2012, debt held by the public was approximately $11.579 trillion or about 73% of GDP. Intra-governmental holdings stood at $4.791 trillion, giving a combined total public debt of $16.370 trillion.

So who is this $16 trillion owed to? Just under $5 trillion of the national debt is owed to the Social Security Trust Fund and federal pension systems.

A little more than $11 trillion is owed to foreign and domestic investors and the Federal Reserve, which buys up treasuries in order to drag down interest rates through quantitative easing (ie. printing more money!).

China has actually decreased its holdings of US debt over the past year, dropping from $1.31 trillion in June 2011 to $1.16 trillion a year later, according to the Treasury Department. Japan holds nearly as much, at $1.12 trillion. Those countries are by far the biggest foreign holders, but dozens of other nations, including Brazil, Russia, Taiwan, Switzerland and the United Kingdom hold trillions more. In total $5.5 trillion of the $16.3 trillion, just over a third, is held by foreign investors (see full listing here).

Inside the US, private investors hold nearly $1 trillion in federal debt, while mutual funds, insurance companies and state and local governments hold nearly double that amount.

Despite the fact that America is currently fighting no major war and has lived through a time of great prosperity it is caught in an upward spiral of debt of which over a third is owed to foreign investors. Without a significant decrease in government spending or increase in taxation, this spiral will only increase.

God promised the ancient nation of Israel that if they rejected him they would fall into great calamity including financial calamity:

‘ The foreigners who reside among you will rise above you higher and higher, but you will sink lower and lower. They will lend to you, but you will not lend to them. They will be the head, but you will be the tail. All these curses will come on you. They will pursue you and overtake you until you are destroyed, because you did not obey the Lord your God and observe the commands and decrees he gave you… Because you did not serve the Lord your God joyfully and gladly in the time of prosperity, therefore in hunger and thirst, in nakedness and dire poverty, you will serve the enemies the Lord sends against you. He will put an iron yoke on your neck until he has destroyed you.’ (Deuteronomy 28)

Could it be that America is now facing a similar fate – falling not under the sword but under the financial might of creditors both inside and outside its walls? (see more on the biblical analysis of the debt crisis here).

The US had a glorious Christian past but it is now increasingly driven by a secular agenda.

God’s promise to Israel at a similar time was clear:

‘If my people, who are called by my name, will humble themselves and pray and seek my face and turn from their wicked ways, then I will hear from heaven, and I will forgive their sin and will heal their land… But if you turn away and forsake the decrees and commands I have given you and go off to serve other gods and worship them, then I will uproot (Israel) from my land, which I have given them, and… I will make it a byword and an object of ridicule among all peoples.’ (2 Chronicles 7:14)

Might America turn? It is not too late yet, but it seems it will not be too long before it is.

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94% of Britons don’t understand what’s happening to the country’s national debt

94% of British people don’t understand what is happening to the country’s national debt according to a new Com Res poll.

As explained this week by Spectator Editor Fraser Nelson, most Britons confuse the concepts of deficit and debt and politicians and the media don’t help to resolve the confusion.

To put it simply, the deficit is the amount that the British government borrows every year to balance the budget. This amount has fallen slightly as a percentage of GDP.

But the debt is the total amount the government owes and this amount is rising steadily and will rise a further £600 billion by 2015.

So the fact is that despite all the coalition government’s austerity measures our deficit is rising at such a rate that Britain will have the worst deficit in the Western world by 2015 (see chart). And this means that our national debt is getting bigger, bigger and bigger every year.

As Nelson says, ‘The word “deficit” is to blame. It’s a wonk word, that normal people don’t use – at home or at work. If most people had to guess, they’d say “deficit” is another term for “government debt.” When MPs say “we’re cutting the deficit,” most people hear “we’re cutting the debt.”’

But this is not so at all.

Nelson adds, ‘In America, broadcasters tend to use more straightforward vocabulary like “balance the books” and “stem the rise in debt.”’

One wonders if the use of this confusing language is not just incompetence in communication but rather a deliberate ploy to pull the wool over the eyes of British voters and tax payers.

Anyway here’s the poll, sample 2,002 adults… showing that only 6% got the right answer. This you tube video explains it graphically clearly and simply. It should be compulsory viewing.

Which of these statements do you believe to be the most accurate?

49% - The Coalition Government is planning to REDUCE the national debt by around £600 billion between 2010 and the end of this Parliament in 2015

14% - The Coalition Government is planning NEITHER TO REDUCE NOR INCREASE the national debt between 2010 and the end of this Parliament in 2015

6% - The Coalition Government is planning to INCREASE the national debt by around £600 billion between 2010 and the end of this Parliament in 2015

31% - Don’t know

There is a fascinating website called UK Debt Bombshell which starts as follows:

Britain owes over £1 trillion. It's real, it's ours… and we've got to pay it back. It's a truly frightening figure. Why is the world's sixth richest country so deeply in debt?

Every year the UK runs a large budget deficit. The Government spends more money than it can tax, so we plug the gap by selling bonds to investors at home and abroad. These bonds - known as gilts - have to be repaid in full, with interest. Added together, our unpaid loans make up the UK's national debt.

Right now, that debt is growing violently. The Government forecasts it will soar to an eye-watering £1.5 trillion by 2016. To put that in perspective, the UK went bust in 1976 running a budget deficit of 6% of GDP. In 2012 that deficit is going to top 8.9%.

•We owe £17,324 for every man, woman and child
•That's more than £38,086 for every person in employment
•Every household will pay £1,924 this year, just to cover the interest

The figures on the site are a little out of date but it tackles the following questions in a very straightforward way. Well worth a look.

Q: Why is Britain in so much debt?
Q: Who do we borrow all this money from?
Q: How is national debt measured?
Q: What are we spending the money on?
Q: Does it matter how government spends the money?
Q: How will national debt affect our future?
Q: Is the problem getting better or worse?
Q: What can we do to prevent a debt crisis?
Q: Has Britain always been in so much debt?
Q: Is it right for us to borrow and spend like this?
Q: Are we really printing money?
Q: What are your sources of information?

The Good Book says, ‘The rich rule over the poor, and the borrower is slave to the lender.’ (Proverbs 22:7). It also says, ‘The wicked borrow and do not repay, but the righteous give generously’ (Psalm 37:20-22).

How are we personally responding?

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