WHO IS THE USA IN DEBT TO? (PART I)
By Valentin KATASONOV | Friday, November 1, 2013
It is not just the types of debt that arise and
accrue in the American economy, but also a core group of well-known debtors.
This includes the federal government, state and local governments, the
financial and non-financial sectors of the economy, and the household sector.
And this raises an interesting question: who is this core group of debtors in
debt to?
GOVERNMENT DEBT: «MARKET» AND
«NON-MARKET» COMPONENTS
Despite the fact that US economic
and financial statistics are believed to be some of the most complete and most
detailed, they conceal a number of secrets concerning American debt holders…
One has to be guided predominantly by expert analysis. The required
statistics on debt holders are only
available for one category of debt – the debt of the US federal government.
Sources of information are the US
Federal Reserve’s quarterly statistical review, called the Flow of
Funds Accounts, and the Treasury’s monthly statistical bulletin, Treasury Bulletin.
To begin with, the US government’s
debt can be divided into two categories:
1. Debts held by those who have
purchased US Treasury debt securities on the financial market. First and
foremost, these are Treasury securities and Treasury bills and are referred to
as «market debts».
2. Debts held by various
extrabudgetary social funds and government-funded organisations (US
government accounts). This is sort of like the government borrowing from
itself. It simply moves money from one stash called «funds» to another stash
called «the federal budget».
Or it increases its outstanding
obligations to government-funded organisations. These debts are characterised
by a particular method of execution and accounting; unlike Treasury securities,
they are not traded on the market. It is also debts arising from loans within
the state sector, so-called «non-marketable debts».
It should be noted that the US
Treasury’s largest non-market lender is theThe Old-Age and Survivors
Insurance Trust Fund. In fact, it could be regarded as a subdivision of the
Treasury with a standalone balance sheet. The bundle of securities on the
fund’s balance sheet totals nearly USD 2.5 trillion.
GOVERNMENT DEBTS ISSUED BY MEANS OF
TREASURY SECURITIES have grown quickly in recent
years, both in absolute and relative terms. Their amounts are (in trillions of
dollars, at year-end): 2008 – 6.14; 2009 – 7.59; 2010 – 9.17; 2011 – 10.24; and
2012 – 11.39. As of the middle of 2013, they made up USD 11.71 trillion. In
other words, over the period from 2008 to now, debt issued by means of Treasury
securities has almost doubled.
In 2008, debt issued by means of
Treasury securities made up 65.2 percent of the total government debt. By the
middle of 2013, however, the share of Treasury securities in the government’s
debt had risen to 75 percent. Figures are sometimes muddled up in the media and
even in financial literature due do the fact that in some publications,
government debt is understood to mean both categories of US federal government
obligations, whilst in others it is only the obligations issued in the form of
Treasury securities.
THE MAIN CATEGORIES OF HOLDERS OF US
TREASURY SECURITIES
Let us now look at the structure of
government debt issued in the form of Treasury securities based on the main types
of debt holders. Debt holders like these can be divided into foreign
(non-resident) and American (resident). American debt holders, in turn, can be
further subdivided into debt holders in the financial sector of the economy and
debt holders in the non-financial sector. In the financial sector, the US
Federal Reserve System (Federal Reserve Banks) is distinguished separately from
all other organisations.
The share of foreign holders of
Treasury securities (percent, at year-end): 2008 – 52.9; 2009 – 48.4; 2010 –
48.6; 2011 – 48.8; 2012 – 48.9; and 2013 (mid-year) – 47.9.
The share of the US
financial sector among holders of Treasury securities (percent, at
year-end): 2008 – 36.0; 2009 – 33.9; 2010 – 32.6; 2011 – 38.7; 2012 – 37.3; and
2013 (mid-year) – 38.2.
The share of other US
holders (non-financial sector) (percent, at year-end): 2008 – 11.1;
2009 – 17.7; 2010 – 18.8; 2011 – 12.5; 2012 – 13.8; and 2013 (mid-year) – 13.9.
The share of the FRS among
holders of Treasury securities (percent, at year-end): 2008 – 7.8; 2009 – 10.3;
2010 – 11.1; 2011 – 16.2; 2012 – 14.7; and 2013 (mid-year) – 16.6.
The share of US financial
organisations excluding the FRS (percent, at year-end): 2008 – 28.2;
2009 – 23.6; 2010 – 21.5; 2011 – 22.5; 2012 – 22.6; and 2013 (mid-year) – 21.6.
Other financial organisations include various investment funds (first and
foremost mutual funds), non-governmental pension and social funds, borrowing
and lending organisations (banks), insurance companies and so on.
DOMESTIC HOLDERS OF US TREASURY
SECURITIES
Both popular literature and
journalism usually provide several simplified diagrams of US government
borrowing. They mention that the US Federal Reserve System is said to be the
main holder of Treasury securities. The twelve Federal Reserve Banks (of which
the Federal Reserve Bank of New York is the biggest) are allegedly buying up
all issues of these securities «at the source». We can see that back at the
start of the financial crisis, this share was rather modest.
At the end of 2008, Treasury
securities to the tune of USD 484.5 billion, or nearly 8 percent of the total
volume of these securities, were to be found on the FRS’ balance sheet. By the
middle of 2013, FRS securities already totalled USD 2,159.5 billion, or 16.6
percent. For reference, it should be noted that there have been moments in US
history when the FRS’ share in the ownership of Treasury securities has
exceeded the current level.
In the middle of the 1970s, for
example, the FRS’ share reached 23 percent (equivalent to USD 75 billion in
absolute terms). Experts believe that if current trends continue, the FRS’
share in the ownership of Treasury securities could rise to 20 percent by the
end of 2014.
In no small way, the growth of the
FRS’ share has been helped along by so-called «quantitative easing» programmes.
However, one ought to remember that these programmes were not primarily aimed
at the purchase of Treasury securities, which are classified as high-quality
financial instruments, but at the purchase of «junk» bonds on the US financial
market.
To put it another way, the role of
the FRS in securing government borrowing does not only and does not so much
boil down to the direct purchase of Treasury securities, as the creation of
conditions for such purchases by other segments of the US economy. The FRS
ensures that «junk» bonds on the balance sheets of banks and other financial
and non-financial organisations are replaced with Treasury bonds.
The FRS carries out a dual-purpose
rescue operation: firstly, banks and other private organisations that have not
yet managed to pull themselves together following the financial crisis are
saved and, secondly, it rescues the government. We do not know whether this
rescue operation happens spontaneously or whether it is strictly regulated by
the Federal Reserve. But I think there is every likelihood that it involves a
strictly controlled process.
To begin with, the purchase of
«junk» bonds is carried out in exchange for a commitment by the bank to acquire
Treasury securities with the proceeds. Incidentally, other active operations by
the FRS may also have a «binding» nature.
For example, the Federal Reserve
Bank extends credit to a private American bank in exchange for a commitment by
the latter to purchase a certain number of Treasury securities. Without such an
explanation, it is difficult to believe that banks, investment funds, insurance
companies and other financial and non-financial US organisations are
voluntarily purchasing securities – albeit reliable, but with a symbolic
interest rate.
All the more so if one takes into
account the depreciation of the dollar – the rate is virtually negative. It is
a case of all financial and non-financial companies having to pay the
government a further tax by way of the «voluntary-compulsory» purchase of
Treasury securities on top of the taxes they already pay.
Experts admit that the FRS, either
directly or indirectly, is backing the purchase of 35-40 percent of all US
Treasury securities, and within the US (without foreign purchasers) – 70-80
percent.
Altogether, by the end of the first
quarter of 2013, USD 11,047.4 billion of the US government’s marketable and
non-marketable debt was in the hands of every category of American debt
holders, according to official data from the US Treasury. The amount of
marketable debt (Treasury securities) in the hands of American debt holders at
that time amounted to USD 6,362.6 billion.
These debt holders include (in
billions of dollars): the FRS – 1,972.0; borrowing and lending organisations
(banks) – 341.4; private pension funds – 457.7; the pension funds of states and
local authorities – 229.0; mutual funds – 946.4; insurance companies – 263.3;
state and local governments – 474.5; and other debt holders – 1,678.2.
The last of these groups is
extremely mixed and includes companies and organisations in the non-financial
sector of the economy (corporations, small- and medium-sized businesses),
individuals, other types of funds (including banks’ personal trust funds), as
well as brokers and dealers and other types of investors.
Let us look more closely at the
modest role banks play among US holders of marketable debt: they hold just a
little more than 5 percent of all Treasury securities within the US. Even back
in the middle of 2008, when the flywheel of the financial crisis was in full
spin in America, there were even fewer Treasury securities on the balance
sheets of American banks – nearly USD 100 billion.
Today, this figure has increased
more than threefold. Some experts consider such an increase to be kickbacks by
banks for the enormous sums (nearly USD 2 trillion altogether) spent by the
government to save the US banking system during the financial crisis.
(To be continued in Part II)
Valentin KATASONOV | Strategic Culture Foundation
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