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.