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. 

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.

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?

Sharp analysis of the real cause of current Western economic instability

A couple of weeks, just before stock markets took a frightening tumble worldwide, I blogged that Merkel and Sarkozy’s ‘extend and pretend’ policies would fail because the real problem was not liquidity but solvency.

I was interested to see in this week’s Times an analysis from Terry Smith, chief executive of Tullett Prebon and of Fundsmith, on the background to our current woes.

Although his solution to the crisis is quite controversial (cutting both government spending and taxes) his analysis of the crisis being indicative of an economic power shift from the Western to Eastern world is bang on. Smith argues first that we have been living in a fool’s paradise:

If we in Britain want to develop the right policies to get us out of our current economic mess, we first need to face up to the cold hard reality that for the past 30 years we have simply been living way above our means.

The West has been outcompeted by the rise of manufacturing and service industries in the developing world. Software programmers in India and Chinese factory workers are willing to work for much less than their Western counterparts. The West’s population has been greying as the baby-boomers pass into old age and advances in medical care have lengthened our lives, increasing the cost of pensions and medical services.

Rather than face the decline in living standards that these fundamental changes entail, we continued to spend so that our standard of living was maintained. More innovative ways were found for people to borrow more and for banks to lend more.

Savings ratios dropped to negligible levels — in the UK from 11.7 per cent of incomes in 1992 to 2.0 per cent by 2008. The size of the public sector swelled to make up for private sector job losses and governments ran deficits as this expansion inflated their costs beyond their tax revenues.

Smith proceeds to show how we have borrowed beyond our means in order to support a lifestyle that we cannot afford, whilst thinking falsely that we can grow our economy to compensate:

This borrowing binge created a housing bubble here, in the US and elsewhere. The ‘solution’ to the banking crisis that broke in 2007-08 when this bubble burst has been for governments to provide capital and liquidity to banks and to guarantee their liabilities. In so doing, Western government finances already in deficit have become unsustainable.

In the UK, government debt is at about 75 per cent of GDP. But if public sector pension liabilities are included, the UK’s debt to GDP ratio would rise to 155 per cent. If the private finance initiative is included and the guarantees given to the banking sector were ever called upon, it would rise to more than 240 per cent.

The situation in the US is worse, with federal debt at 96 per cent of GDP rising to 390 per cent if social security and Medicare liabilities are included. The problem for the US is not political wrangling over the so-called debt ceiling. It is that the US budget deficit has risen continuously since the crisis began and there is no credible plan to check its rise. As in the UK, the spending ‘reduction’ plan relies not upon any actual cuts but upon heroic assumptions about growth that are clearly without foundation in reality.

The eurozone suffers from this same general problem, but it is exacerbated by the single currency. The entry of the peripheral countries into the currency led markets to assume that the credit risk on euro debt issued by them was roughly the same as that of Germany. This bizarre assumption led to the borrowing costs of these countries falling toward those of Germany. Faced with this, these countries went on an orgy of spending, racking up huge government debts. Property prices were inflated, public sector jobs increased, pensions were guaranteed at early retirement ages, and, in some cases, this was coupled with the national pastime of tax evasion.

The consequence has been the bailouts of Ireland, Greece and Portugal, with Italy and Spain now facing a similar prospect.

However, he argues, politicians fail to admit what the real problem is, and for fear of upsetting voters, are unwilling to take the painful steps necessary to put things right:

But politicians continue to deny the painful reality that we have been living beyond our means. So we will probably have more so-called quantitative easing (QE). But ‘printing money’ to fund these growing deficits rather misses the point: if you are spending more than your income, at some point you need to get someone who has money to lend it to you or accept that your currency will be devalued.

Conventional policy responses, such as cutting interest rates to increase demand, are not working. For the past three years, UK rates have been at their lowest level since 1694. Yet despite record low rates, huge government deficits and QE, the economies of the West are still stuttering. Only yesterday the Bank of England cut its growth forecast with Mervyn King saying ‘the imbalances in the world economy are still not being properly tackled and the burden of debt is still there.’

Tuesday’s announcement that US interest rates are expected to remain close to zero until 2013 was greeted with relief by the markets. But these long periods of low rates tell you how bad the crisis is. They are not a solution: look at the Japanese experience of the past two decades.

Smith closes by advocating huge government spending cuts along with tax cuts which is he says are the only way of boosting growth, but he acknowledges that this will cause a huge amount of pain. His best advice is never to get into such a situation:

‘It reminds me of the advice in a manual on seamanship: “Perhaps the worst plight of a vessel is to be caught in a gale on a lee shore. In this connection the following ... rule should be observed: Never allow your vessel to be found in such a predicament . . .”’

I am not an economist but I have always lived by the rule that your expenditure should be less than your income and that you should stay out of debt. It saves a lot of worry.

This basic wisdom seems not to have been grasped by Western governments who seem set on postponing the evil day rather than addressing the real problem.

Rev John Wesley’s famous aphorism was, ‘Earn as much as you can. Save as much you can. Invest as much as you can. Give as much as you can.’

But Western governments instead live by, ‘Borrow as much as you can. Save as little as you can. Spend as much as you can. Give as little as you can.’

As the Good Book says, ‘The prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences.’ (Proverbs 22:3)

My advice? ‘Live simply. Save wisely. Give generously. And get out of debt quickly cos the hard rain’s gonna fall!’

Britain pays £129million a day interest on its national debt

As we limp towards the possible US default on their national debt next Tuesday I see that Nadine Dorries MPs’ monthly Bedford News column this week is titled, ‘Time to act, before we become another Greece’

She is not talking about the US but about Britain.

‘When I tell people that we are paying £129million per day interest on the country’s debt, they are amazed. That’s not the debt capital we are paying back, it’s just the interest on the capital.

No country can continue with that level of debt or continue to increase it, because if we do, in a very short space of time, we will be the next Greece. Not paying off our debt and getting it down to at least manage levels would eventually put the state in the position of not being able to pay its own bills.

Being in such a severe amount of debt means that the world bank, investors, the IMF and others begin to lose confidence in our ability to pay back and so they only then lend us money at a very high interest rate, which makes the situation far worse.’

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

‘Britain owes over £900 billion. 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 £1.1 trillion by 2011.'

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)

Merkel and Sarkozy ‘extend and pretend’ policies will fail because the real problem is not liquidity but solvency. Read the signs.

This blog is about 1,000 words long – but a picture is worth a thousand words and the key message is told by simply looking at the two pictures on this page (from the BBC and Sunday Times) It is not difficult to see what they are saying.

Whilst newspaper headlines have been dominated by the Murdoch hacking scandal, the Norwegian massacre and Amy Winehouse’s death economic issues have been pushed off the front pages and out of the public eye.

But the Sunday Times business section today carries the headlines of ‘Recovery stalls amid euro crisis’, ‘Greek bailout only postpones inevitable tragedy’, ‘Euro patched up… for now’ and ‘Osborne battles to conquer debt mountain’.

And the top story on the BBC is about the American’s failure to reach agreement on a new ceiling for the nation’s debt. Just over a week ago we read that ‘US trade deficit widens to more than $50bn in May’, the highest level in 31 months.

We read that the ‘the latest Greek bailout has solved its immediate problems, but doubts linger over how long the sticking plaster will hold’.

Robert Watts and Iain Dey review recent events as follows:

Last Thursday night, Europe’s leaders unveiled a deal that was designed to assure the markets that it had filled in that big, black hole in the Greek national finances — and contained the fears that were spreading across the eurozone.

A second bailout worth €109 billion (£96 billion) was agreed for the Greek economy, with private investors set to take a €37 billion ‘haircut’.

Wider reforms intended to address the market turmoil over the finances of Italy, Spain, Portugal and Ireland were also unveiled.

As details of the package started to leak out on Thursday, traders bought the political enthusiasm. By Friday morning, Europe’s main stock markets were rallying and the yields on Spanish and Italian bonds started to drop back from the levels of the past two weeks — which at times had peaked towards the 7% that economists flag as the danger point.

By Friday night, however, the rally had run out of steam. Once the markets picked apart the deal, they realised it was not the panacea the politicians had promised — it was a sticking plaster loosely covering a gaping wound in the side of the single currency.

Last weekend, Iain Dey, deputy business editor at the Sunday Times, in an article titled ‘Agenda: Let’s be clear — this is another financial crisis’ wrote:

Though many have missed it, the western world is balanced in the most precarious of positions once again. We should be terrified.

Unprecedented has become an overused word in the City in the past four years. The freeze in the global credit markets that began in the summer of 2007 was unprecedented, as was the subsequent collapse of Lehman Brothers, and the rescue of Royal Bank of Scotland and HBOS.

Every leg of the crisis has seen a whole new set of assumptions rubbished, another rulebook ripped up and a new paradigm of problems emerge.

This weekend the western world is balanced in the most precarious of positions once again.

Anyone who has been watching the news rather than the markets over the past few days could be forgiven for missing this, but the situation is broadly as follows.

•America will run out of money to pay its bills on August 2 unless its feuding politicians can agree a new deal to make its national debt pile even bigger.
•Europe is staring down the barrel of a seemingly unsolvable debt crisis, with Greece’s problems starting to infect Italy, Belgium and possibly even France.
•Global credit markets have started to seize up again, as they did four years ago. At times last week, the fear factor saw inter-bank lending grind to a virtual halt.
•Gold is soaring to new highs as investors search for a safe port in the storm. Prices are so high that gold mines last worked by Roman slaves 2,000 years ago are being reopened to exploration.

Unprecedented may be one word to describe this baffling confluence of events. Terrifying is another. Were it not for the fact that we’re all so jaded by the idea of countries going bust and banks running out of money, we’d be rather more concerned by all of this.

But I thought the most sense this morning was spoken by business editor Dominic O’Connell in an article I cannot find on the Sunday Times website titled ‘Greek bailout only postpones the inevitable’.

O’Connell says Merkel and Sarkozy’s plan is that by taking the heat off with a massive bailout the Greek economy will start to grow, eventually reaching a happy state where it can deal with its borrowings. But he calls this policy ‘extend and pretend’.

The real problem, he argues, is not liquidity buy insolvency. This latest bailout ducks the real issue – Greece and Ireland – and maybe other members of the eurozone – are bust. I would suggest that on the basis of the graphs on this page Britain and the US are too.

I am not an economist but I have always lived by the rule that your expenditure should be less than your income and that you should stay out of debt. It saves a lot of worry.

This basic wisdom seems not to have been grasped by Western governments who seem set on postponing the evil day rather than addressing the real problem.

Rev John Wellesly’s famous aphorism was, ‘Earn as much as you can. Save as much you can. Invest as much as you can. Give as much as you can.’

But Western governments instead live by, ‘Borrow as much as you can. Save as little as you can. Spend as much as you can. Give as little as you can.’

As the Good Book says, ‘The prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences.’ (Proverbs 22:3)

My advice? Live simply. Save wisely. Give generously. And get out of debt quickly cos the hard rain’s gonna fall!