I read an article in the Financial Times earlier this week (September 23, 2023) -…
I did some research today on the outstanding US public debt – not because I think it is particularly important but because a journalist asked me yesterday during an interview – how much of the total US Treasury Debt is held by the US government – I said off the top of my head about 42 per cent which was a quick calculation based on work I did about 12 months ago and a rapid adding up off what I remembered from the monthly reports since then with a quick division thrown in. It turns out after I have updated the databases I keep that my “guesstimate” was not misleading (as at March 2011). The journalist then said – “so lets get this straight, the US government owes itself money equivalent to 42 per cent of its total outstanding liabilities?” Answer: yes. He then responded: “to fix the debt problem why wouldn’t they just write it off?”. Answer: I don’t see a US public debt problem. But because you do, then the answer is that for the most part they could just write it off as long as their were some additional legislative changes (for example, they would have to finance the operations of the US Federal Reserve in a different manner). So who owns the US debt?
There are a few data sets that you can pull together to break the total US public debt outstanding into various categories. The US Treasury Department provides an extensive (though awkward) data resource – for example, Ownership of Federal Securities.
The US Treasury also provide data which provides a Foreign breakdown.
The US Federal Reserve provides Consolidated Balance Sheet data.
The following pie-chart is the result of some calculations as at March 2011. It shows the proportions of total US Public Debt held by various “interesting” categories. This chart tells you that the government sector held about 42 per cent of its own debt in March 2011 and the private sector held the rest (of-course).
The scare-mongering campaign that has been waged by the deficit terrorists in recent years holds out that US public debt holdings are dominated by the Chinese. If you call 8 per cent a domination then your sense of calibration is different to mine. The three largest foreign US debt holders at March 2011 are China (8 per cent); Japan (6.4 per cent) and Britain (2.3 per cent). The total foreign held share was equal to 31.4 per cent in March 2011.
The US Federal Reserve held 8.9 per cent of total US public debt in March 2011 – that is, more than China. The total holdings were around $US 1,274,274 million.
According to the US Treasury the total outstanding US public debt on August 3, 2011 was $US 14,574,607 million, which means the US Federal Reserve holdings ($US1,640,919 millions) represent around 11.3 per cent of the total outstanding US public debt.
Since January 7, 2010 the US Federal Reserve has increased its public debt holdings from $US 776,591 million to $US 1,640,919 million (change $US 864,328 million) whereas total US public debt has risen from $US 12,280,845 million to $US 14,574,607 (change $US 2,293,762 million). In other words, the US central bank has accounted for 37.7 per cent of the rise in US public debt – the dominant source.
Even more stark is the figures for this year (from January 5, 2011 to August 5, 2011). The the US Federal Reserve has increased its public debt holdings from $US 1,023,962 million to $US 1,640,919 million (change $US 616,957 million) whereas total US public debt has risen from $US 14,011,526 million to $US 14,574,607 (change $US 563,081million). That is dominance.
Given the change in US Federal Reserve holdings over the last year or more one might easily conclude that the US government (consolidated Treasury and central bank) is its largest lender. Government borrowing from itself sort of thing!
Given I claim to be a time series econometrician I always examine the trends over time. The next graph shows the evolution from March 2001 to March 2011 of the US public debt by private, public and foreign holdings (%). The foreign holdings are a subset of the private series.
There are some interesting points to note. At a time when the US public debt ratio has risen beyond what the mainstream claim is the danger point (80 per cent) – the point where they claim governments become insolvent (Rogoff and co), the private demand for US public debt has risen. Private markets know that there is no substantive default risk involved in holding the US Treasury debt notwithstanding the weak-kneed threats of the Tea Party coalition – who caved in last week when the going got tough.
The other point, in relation to the rising foreign share is that you cannot conclude that the foreigners (China, Japan etc) are “funding” the US government. The US government is the only government that issues US currency so it is impossible for the Chinese to “fund” US government spending. To understand the trend shown in the graph more fully we need to appreciate that the rising proportion of foreign-held US public debt is a direct result of the trade patterns between the countries involved (and cross trade positions).
For example, China will automatically accumulate US-dollar denominated claims as a result of it running a current account surplus against the US. These claims are held within the US banking system somewhere and can manifest as US-dollar deposits or interest-bearing bonds. The difference is really immaterial to US government spending and in an accounting sense just involves adjustments in the banking system.
The accumulation of these US-dollar denominated assets is the “reward” that the Chinese (or other foreigners) get for shipping real goods and services to the US (principally) in exchange for less real goods and services from the US. Given real living standards are based on access to real goods and services, you can work out who is on top (from a macroeconomic perspective).
Note that a worker in Detroit who is suffering from unemployment as a result of cheaper imports coming from nations with lower labour standards (pay and conditions) than the US is unlikely to agree with me. In his/her case I wouldn’t agree with me either. But I am writing as a macroeconomist here without regard to equity which isn’t to say that equity isn’t a crucial policy aim as well. I will write a blog about the microeconomic impacts of trade and especially unfair trade another day. But please do not think I disregard the plight of workers who are undermined by cheap labour nations. It is a complex issue.
Now what about the journalist’s question that the US government could reduce its debt immediately by writing off the holdings held by the US Federal Reserve current over $US1.6 trillion.
On June 28, 2011, the rather ill-informed Republican congressman from Texas and a would-be US President, Ron Paul told CNN that the U.S. should declare ‘bankruptcy’. He was asked:
If bankruptcy is the cure for Greece, is it also the cure for the United States?
And in that one word reply you can safely conclude that he doesn’t have even a basic understanding of the differences between the monetary system (EMU) that Greece has to operate within and the fiat monetary system that the US government runs as a monopoly-issuer of its own currency.
Greece could go bankrupt – by which we mean would be unable to pays its bills in Euros – because it effectively uses a foreign currency and cannot instruct “its” central bank to provide adequate funds. It actually doesn’t have a central bank anymore given that the Greek central bank is part of the European Central Bank system.
The US government can never become bankrupt. Several readers have acknowledged comments made yesterday by the former US Federal Reserve Governor Alan Greenspan to CNBC. He said in relation to S&Ps decision:
The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.
The level of surprise that a former central banker (albeit a very conservative free market-oriented one) would say such a thing surprises me. It is no secret. The way the mainstream economists have pushed this capacity under the carpet is via the hyperinflation myth. They have effectively been able to pressure governments into borrowing (back their own spending) from private markets to “fund” its spending when they know clearly that such an act is totally unnecessary.
There was an interesting PBS News Hour program a few years ago (October 7, 2008) as the US Federal Reserve was about to introduce its Quantitative Easing program for the first time. The program – Federal Reserve Employs Tools to Ease Credit Fears – interviewed economist Alan Blinder, a former vice chairman of the Board of Governors of the US Federal Reserve. Here is a snippet of the transcript after being asked to explain how the US Federal Reserve gets “money into the system”:
Well, when the Fed first starts these operations, including the other ones they do, what they try to do is re-jigger their balance sheets, sell one asset, and that for the Fed has been mostly been treasuries, and buy something else.
As that capacity gets used up, the Fed can no longer swap one asset for another. And then it has to … we use the euphemism “print money.” What that really means is somebody is on a keyboard creating electronic images of money. Large amounts of money are not cash.
So these are credits at the Federal Reserve system basically. A central bank can do that; a commercial bank cannot do that.
That couldn’t be clearer.
And then we might just recall what the current US Federal Reserve Governor matter-of-factly told the US Congress (Committee on Financial Services) on July 14, 2011 (Ron Paul is part of that Committee). The Chair Congressman Duffy asked him:
DUFFY: … When – when you buy assets, where does that money come from?
BERNANKE: We create reserves in the banking system which are just held with the Fed. It does not go out into the public.
We can argue about the technicalities but the essence is that there is no revenue-constraint operating here.
The discussion continued:
DUFFY: Does it come from tax dollars, though, to buy those assets?
BERNANKE: It does not.
Once again technicalities aside (for example, the purchase of interest-bearing assets from the private sector reduces private incomes which some might consider to be a “tax”), this reinforces the fact that the government, in this case, the federal reserve, is not revenue-constrained.
DUFFY: Are you basically printing money to buy those assets?
BERNANKE: We’re not printing money. We’re creating reserves in the banking system.
This is the electronic version of “printing money” which in Modern Monetary Theory we refer to as adding financial assets to the non-government sector.
The point here though is that the central bank acts as “part” of the overall US government (consolidated treasury-central bank) and can credit bank accounts at will. Please read my blog – The consolidated government – treasury and central bank – for more discussion on this point.
Think about what a US dollar is. Anyone holding one can present them (or the electronic version – deposits) to the US government in return for a tax credit (payment of their tax liabilities). So when the Federal Reserve credits bank accounts it is really providing Treasury tax credits to the holders of those accounts.
When a US citizen (this applies in any sovereign nation) pays their taxes the conceptual chain of events is that the central bank accounts for the payment (acknowledging the tax credit) and informs the Treasury that the tax obligation has been eliminated. The dollars don’t go anywhere! The scores are adjusted – that is it. So the central bank crediting behaviour creates assets in the non-government sector which sit in reserves held by the member banks.
The conclusion is obvious as it is powerful. These electronic credits come from nowhere and enter the non-government sector as a tax credit against obligations that the non-government agents have to government. The source of these funds cannot come from the taxpayer. Similarly, when the tax credits are redeemed they go nowhere other than into accounting books to record the events.
At this point, Ron Paul must have been “having kittens” during the Committee meeting. But back to his proposal (espoused during that CNN bankruptcy interview). In outlining that the Federal Reserve should be eliminated he said:
We owe, like, $1.6 trillion because the Federal Reserve bought that debt, so we have to work hard to pay the interest to the Federal Reserve … We don’t, I mean, they’re nobody; why do we have to pay them off?
Exactly, the government owing itself through a sequence of elaborate accounting tricks.
Now the build-up of public debt on the US central bank balance sheet arose from its Quantitative Easing program which was conducted on the false premise that the private banks were not lending because they didn’t have enough reserves. Please read my blog – Quantitative easing 101 – for more discussion on this point.
The reality is that it did nothing much – an asset swap – but denied the non-government sector of income as a result of the public debt being purchased by the US Federal Reserve. So the demand effects could have been, in fact, negative. It will be hard to determine that empirically.
But once the “damage” is done, the fact remains that the consolidated US governments holds 11 per cent of its own debt within the US Federal Reserve and more in other areas of the public sector (Social Security etc). None of those assets are necessary for anything given that the US government issues the currency and does not need to “save” before it can spend.
Some would respond by saying that the Federal Reserve provides interest earnings to the Treasury ($US 79 billion in 2010) and that the writing off of the assets from the central bank’s balance sheet would further squeeze the US government of revenue. Of-course, there is no sense to that statement once we understand the US government is never revenue constrained because it is the monopoly issuer of the currency. So the “interest payments” are an accounting ploy which do not enhance the capacity of the government to spend.
That is in contradistinction to interest payments from government to non-government holders of public debt. They add to income and enhance the capacity of the holders to spend.
What would happen if the US Federal Reserve did write off all the public debt holdings? Would they go broke? Hardly. Please read my blog – The US Federal Reserve is on the brink of insolvency (not!) – for more discussion on this point. The US central bank and hence the US government cannot go broke.
So the blog today just documents some of the work I was doing today – an hour or so of digging. It is more some “notes” than a definitive response to Ron Paul’s proposal. Essentially, I do not consider there to be a public debt problem in the US so the point is rather moot.
I also was looking at geographical data today documenting the unemployment rates by gender for British localities. If you overlay the labour market performance with the suburbs where the riots are occurring at present you get a pretty good fit in terms of scale versus impact. While the riots are seemingly a response to the death of a young boy at the hands of a very insensitive police force in Tottenham, the underlying causes are deep and relate to entrenched disadvantage being perpetuated through the education system and then the labour market. It might be that a GIS “forecasting” model could be assembled to predict where social unrest will become endemic as the capitalist system fails to deliver prosperity to all citizens.
The fiscal austerity will render these trends more stark. I thought this UK Guardian article (August 8, 2011) – If the rioting was a surprise, people weren’t looking – presented an interesting perspective. I started a PhD in Manchester just after the riots in the early 1980s and became very familiar with the socio-economic challenges facing the largely black communities in the inner-city (Moss Side etc). A society can only deprive a growing minority for so long.
The proponents of fiscal austerity seem to assume that everyone will play by the same rules as the punishment is meted out via spending cuts etc on selective segments of the population (usually those already significantly disadvantaged). The problem is that civilisations eventually fail because the rules change and the riots are an expression of a process where some cohorts are already well on the way to rejecting the authority of those who police the austerity on behalf of the top-end-of-town. The poor just have to learn to become mobile and inflict the damage across town rather than in their own neighbourhoods for a revolution to begin.
That is enough for today!