Barry Ritholtz, author of the Big Picture blog, posted an interesting article detailing who actually owns most of our outstanding debt. Turns out we own most of it.
“I keep hearing people erroneously claim that China is funding US deficit spending. It seems that every eejit with a fundamental misunderstanding of mathematics (and access to Xtranormal‘s animated talking bears) has been pushing this concept.
It turns out to be only partially true — and by partially, I mean 7.5% true. But that means the statement is 92.5% false.
The biggest holders of US debt are American individuals, institutions, and Social Security. We own more than 2 out of every 3 dollars of US debt — about over 67%. Hence, we depend far less on the kindness of strangers than you might imagine if your listen to the intertubes.
Those viral animated bears may be clever, but they sure suck at math.
Total United States’ public debt was ~$13.562 trillion at the end of the fiscal year (30 September 2010). As of last week, January 4, 2011, the United States’ total public debt outstanding has surpassed 14 trillion dollars.
Political Calculations has whipped up a chart showing exactly who is holding US debt, and funding our deficit:
click for bigger graphic
U.S. Treasury Department:
Monthly Statement of the Public Debt of the United States (September 30, 2010)
Major Foreign Holders of Treasury Securities. (At end of September 2010)”
Beezer here. So if China, and Britain as it turns out, stopped buying our Treasuries what would happen? Nothing actually. The Fed would buy the Treasuries. So we would become even larger owners of outstanding Treasuries.
Critics maintain that the real problem is the amount of the outstanding Treasuries, not necessarily who owns them. After all, the larger the amount, the more difficult the payment of principal and interest–especially if interest rates rise substantially. Which is true particularly if the economy doesn’t grow and even worse if it shrinks in recession. That’s because a currency’s value is based upon the value of its underlying economy. A robust economy producing goods and services of real value will also produce a currency of real value as well.
Modern Monetary Theory (MMT) argues that issuing Treasuries is unnecessary. With a fiat currency that freely floats and is convertible almost anywhere, the Government could directly inject liquidity into the economy without selling any Treasuries or owing anyone interest either. Theory or not, federal law mandates the method that must be used is to issue government bills, notes and bonds which are sold and traded through the larger, mostly Wall Street, banks. Which, of course, is a ‘service’ for which the taxpayer pays the banks. A bank subsidy, in other words. Not to mention the interest rates incurred by this system.
There’s another angle to this method of raising funds Beezer finds interesting. A very large owner ($2.5 trillion) of this debt is Social Security. No wonder Republicans want to diminish Social Security’s portion of what we all owe. Now that Republicans rule the House, you can be assured an assault will be mounted on Social Security benefits.
What would be the effect on Social Security if the government didn’t rely on issuing treasuries to fund itself? Social Security would have to invest in the economy instead, just like all other pension or retirement plans. These retirement funds, particularly SS and pensions, would have to stick primarily to AAA securities, such as those of financially sound corporations. If needed the Fed could sell a limited amount of special purpose treasuries to provide a sufficient quantity of AAA securities. But still, expanding the investment options for SS would increase it’s rate of return, lower the necessary contributions for its funding and directly provide additional capital for private investment.
And it’s productive capital investment that creates robust, sustainable economies and stable currencies. Unfortunately Republicans have a serious problem with these concepts. They believe it’s tax cuts that best create robust, sustainable economies and stable currencies. Which means you need to have smaller government because there will be less revenue if taxes are cut. Otherwise you run up deficits and pile on too much debt.
Despite their sudden hawkishness on paying the bills, all the previous versions of Republicans the past 30 years have taken the ‘otherwise’ option of running up deficits and debt. The last government surplus came during Democrat President Clinton’s second term. New versions of Republicans, or at least their leadership, don’t seem to have changed much. Their ‘compromise’ with President Obama was larded with more tax cuts and added yet another trillion to the nation’s debt.
Something has to give. The temporary additional stimulus might help sustain demand to keep the economy from folding over, but continuing to support demand with deficit funding can’t be the final answer. The final answer is to produce a sustainably robust economy that generates high employment levels and increasing government revenues to reduce deficits and debt.
If ’tax cuts pay for themselves’ remains the dominant economic theorem we’re in real trouble if recent history is a reliable guide. This was the dominant economic theorem during George Bush’s two terms and it in no way worked. Employment growth was negligible, the debt ballooned and his second term ended with the Great Recession running full steam downward.
Even under President Reagan, who inherited a fairly nasty recession created by Fed Chairman Paul Volcker’s raising of interest rates during President Carter’s second term, a round of tax cuts increased debt but unemployment remained high and was 10% during Reagan’s third year. It wasn’t until the fourth year government revenue surpassed, in real terms discounting inflation, that of his first year. The primary reason for the recovery was that Volcker dropped rates after he was convinced he’d overcome inflationary trends begun during Carter’s last term. This was the primary dynamic that drove the recovery, not tax cuts. In fact, after his first splurge of tax cutting, Reagan spent the remainder of his two terms raising taxes substantially five times! And, of course, raising deficits too.
Another headwind against improving the economy is infrastructure. As bad as the recent and current deficits are, our deficient infrastructure poses an equal threat. We have legacy infrastructures, particularly ones in transportation and energy, that badly need modernizing. In energy’s case, the economy is hostage to whims of foreign supplies. Failure to speedily address the infrastructure issues will condemn our economy to under produce, which not only lowers wages and income, but demeans our currency and invites inflation.
In short, it’s not just debt, it’s what debt pays for. If the debt produces strong infrastructure that undergirds economic recovery, it will produce the means to reduce deficit/debt. If the Republicans reassert their belief that ’tax cuts pay for themselves’ and it turns out they are wrong, again, then we’re in a leaky boat load of trouble. The debt will increase and the means to pay it down will be reduced. Sounds exactly like the 8 years of George Bush, in other words.