I read an interesting report this morning, which resonated with some other work I had…
The hoopla over the US government voluntarily imposed debt ceiling is about to begin again with the US Treasury Secretary predicting that the government will run out of money in mid-October. He must have been listening to his President who told an audience at the State University of New York the other day, that in the face of rising demands for more government expenditure of education “At some point, the government’s going to run out of money” (Source). It is not the first time he has made that claim. Please read my blog – The US government has run short of money – for more discussion on this point. The debt ceiling is one of those ridiculous conventions that government introduce which from time to time provide some quaint, if not bizarre, theatre. But none of the conservatives will have the intestinal fortitude to really drive the US government artificially broke anyway. Anyway, all this was amusing me as I read the latest – US Federal Reserve Flow of Funds – data the other day. That data tells us that the US government can buy as much of its own debt as it chooses. Game over!
This relevant data comes out on a quarterly basis with the latest publication being August 22, 2013. Other related data from the US Treasury (noted below) fills out the picture. The data reveals some interesting trends in terms of US federal government debt issuance over the last 12 months. It shows that the dominant majority of federal debt issued in 2011 was purchased by the US Federal Reserve. Some conservative commentators have expressed horror about this trend. As a proponent of Modern Monetary Theory (MMT) I simply note that the trend demonstrates the nearly infinite capacity of the US government to spend.
According to this story (August 27, 2013) – US to hit debt ceiling in mid-October – the US Treasury secretary has written to the US Congress urging them “to raise the limit from the current $US16.7 trillion ($A18.5 trillion)” apparently because if they didn’t it would “would cause irreparable harm to the American economy”.
Apparently, the US government has been gaining increasing revenue, which has meant the ceiling has not become operational in the administrative sense.
But he claimed that:
… if investor demand for US government debt declines, the country could face an immediate cash shortfall.
How likely is that? Not very likely. And should the private sector choose not to buy debt that was issued there is always the central bank. It can buy unlimited amounts of public debt should it so choose.
Here is an update on some research I did in this regard a few years ago which appeared in these blogs – The nearly infinite capacity of the US government to spend and When the government owes itself $US1.6 trillion.
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 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 shows the proportions of total US Public Debt held by various “interesting” categories as at March 2011. This chart tells you that the government sector held about 42 per cent of its own debt in March 2011. These holdings were either in the intergovernmental agencies or the US Federal Reserve.
The Chinese holdings were around 8 per cent of the total and hardly consistent with the rhetoric of the deficit terrorists that China was bailing the US government out.
The three largest foreign US debt holders at March 2011 were 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.
The following pie-chart represents the situation in March 2013, two years later. This chart tells you that the government sector held about 39 per cent of its own debt in the March-quarter 2013 and the private sector held the rest.
The Chinese holdings had fallen to 7.6 per cent which has been about constant since the end of 2011.
The three largest foreign US debt holders at March 2013 are China (7.6 per cent); Japan (6.6 per cent) and the so-called Caribbean Banking Centers, which include Bahamas, Bermuda, Cayman Islands, Netherlands Antilles and Panama (1.7 per cent). The Oil Exporters come next (1.6 per cent). The Oil Exporters include (Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria).
The impact of the British austerity is noticeable. In March 2011, Britain was the third largest holder of US public debt (at 2.3 per cent of total US public debt). By March 2013, this had dropped to 0.95 per cent. They shed $US166 billion worth of US treasury securities in that 24 month period).
The total foreign held share of outstanding US public debt was equal to 34.1 per cent in March 2013 – which is a relatively stable proportion.
The following Table shows the proportions of the total change in US federal government debt for the calendar years 2009 (so the change is between 2008-09 and so on) to 2012-13 accounted for by the main holders – Federal Government Accounts, Total non-government (public), which is, in turn, decomposed further into US Federal Reserve holdings. There are other components not included.
In 2011, the increases in the US Federal Reserve’s holdings accounted for 62 per cent of the total increase in US federal government debt. That fell away to 4.1 per cent in 2012 and so far this year the proportion has risen again to 29 per cent.
There was a dramatic shift in the mix of debt holders other than Federal Government accounts in 2011. The central bank can alter this proportion whenever they choose and that includes to purchase any debt that the private sector chooses not to purchase.
In other words, the US government (consolidated Treasury and central bank) can always assume the role as its own largest lender. That is, the Government can always borrowing from itself!
That is how nonsensical these voluntary conventions are. They sound robust but in the end the currency-issuer is the currency-issuer and can always work around the so-called constraints.
The next graph shows the evolution from March 2001 to March 2013 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 after which those spreadsheet mavens claim insolvency is nigh (Rogoff etc) – 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.
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 from the perspective of macroeconomics there is no issue.
As a proponent of MMT, I do not consider there to be a public debt problem in the US so the analysis presented here is out of interest rather than establishing anything substantive.
However, what it shows is that even within the voluntarily-constrained system that regulates the relationship between the US treasury and the central bank, the latter can still effectively buy as much US government debt as it likes.
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.