http://useconomy.about.com/od/monetarypolicy/f/Who-Owns-US-National-Debt.htm
Updated November 30, 2015.
The U.S. debt is more than $18 trillion. Most headlines focus on how much the U.S. owes China, which is one of the largest foreign owners. However, the biggest owner is actually the Social Security Trust Fund, aka your retirement money. How does that work, and what does it mean?
The Debt Is in Two Categories
The U.S. Treasury manages the U.S. debt through its Bureau of the Public Debt. It's broken out the debt into two main categories: Intragovernmental Holdings, at $5.232 trillion, and Debt Held by the Public, at $13.488 trillion (Source: Debt to the Penny, U.S.
Treasury, as of November 25, 2015)
Intragovernmental Holdings - Nearly 30% of the Federal debt is owed to about 230 other Federal agencies. Why would the government owe money to itself? Some agencies, like the Social Security Trust Fund, take in more revenue from taxes than they need right now. Rather than stick this cash under a giant mattress, they buy U.S. Treasuries with it.
This effectively transfers their excess cash to the general fund, where it can be spent. Of course, one day they will redeem their Treasury notes for cash. The Federal government will either need to raise taxes, or issue more debt, to give the agencies the cash they will need.
What Is The National Debt?
Which agencies own the most Treasuries? Social Security, by a long shot. Here's the detailed breakdown (as of September 30, 2015):
Social Security (Social Security Trust Fund and Federal Disability Insurance Trust Fund) - $2.808 trillion
Office of Personnel Management Retirement - $798 billion
Military Retirement Fund - $531 billion
Medicare (Federal Hospital Insurance Trust Fund, Federal Supplementary Medical Insurance Trust Fund) - $266 billion
All Other Retirement Funds - $120 billion
Cash on Hand to Fund Federal Government Operations - $504 billion. (Source: Treasury Bulletin, Monthly Treasury Statement, Table 6. Schedule D-Investments of Federal Government Accounts in Federal Securities, September 2015)
Debt Held by the Public - Foreign governments and investors hold nearly half of the nation's public debt. One-fourth is held by other governmental entities, like the Federal Reserve, and state and local governments. Fifteen percent is held by mutual funds, private pension funds, savings bonds or individual Treasury notes. The rest is held by businesses, like banks and insurance companies, and a mish-mash of trusts, businesses and investors.
Here's the breakout:
Foreign - $6.176 trillion
Federal Reserve - $2.394 trillion
Mutual Funds - $1.235 trillion
State and Local Government, including their pension funds - $710 billion
Private Pension Funds - $481 billion
Banks - $511 billion
Insurance Companies - $295 billion
U.S. Savings Bonds - $175 billion
Other (individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors) - $834 billion. (Sources: Federal Reserve, Factors Affecting Reserve Balance, November 27, 2015. Treasury Bulletin, Ownership of Federal Securities, Table OFS-2, as of March 2015)
This debt is not only in Treasury bills, notes, and bonds but also TIPS and special State and Local Government Series securities.
As you can see, if you add up debt held by Social Security, and all the retirement and pension funds, nearly half of the U.S. Treasury debt is held in trust for your retirement. If the United States defaults on its debt, foreign investors would be angry, but current and future retirees would be hurt the most.
Why Does the Federal Reserve Own Treasury Debt?
As the nation's central bank, the Federal Reserve is in charge of the country's credit, so it really doesn't have a financial reason to own Treasury notes. So why did it double its holdings between 2007 and 2014?
That's when it ramped up its open market operations, purchases of Treasuries. This Quantitative Easing stimulated the economy by keeping interest rates low, escaping the grips of the recession.
The Fed's been criticized for simply monetizing the debt. The Fed purchases Treasuries from its member banks, using credit it created out of thin air. This has the same effect as printing money. By keeping interest rates low, the Fed helps the government avoid the high-interest rate penalty it would usually incur for excessive debt.
The Fed ended QE in October 2014. As a result, interest rates on the benchmark 10-year Treasury noterose from a 200-year low of 1.442% in June 2012 to around 2.17% by the end of 2014. For more, seeRelationship Between Treasury Yields and Mortgage Rates.
What About Foreign Ownership of the Debt?
China is the largest holder, holding $1.258 trillion in September 2015. Japan is next, at $1.177 trillion. Both Japan and China want to keep the value of the dollar high when compared to their own currencies. That helps their exports to the United States seem more affordable, which helps their economies grow. That's why, despite China's occasional threats to sell its holdings, both countries are happy to be America's biggest foreign bankers. China replaced the United Kingdom as the second largest foreign holder on May 31, 2007. That's when it increased its holdings to $699 billion, outpacing the UK's $640 billion.
The Caribbean Banking Centers are third, at $321.8 billion. Luxembourg is ninth ($191 billion) and Belgium is 12t ($135,8 billion) billion. The Bureau of International Settlements believes both all three are fronts for sovereign wealth funds and hedge funds that don't want to reveal their positions.
The oil exporting countries are fourth, holding $291.3 billion. Brazil is the fifth at $251.6 billion. The next largest holders are Switzerland, Ireland, the UK, Hong Kong, Taiwan, Singapore and India. They hold between $113-$227 billion each. (Source: Foreign Holding of U.S. Treasury Securities. U.S. Treasury report Petrodollars and Global Imbalances, February 2006) Article updated November 30, 2015. Data is from various reports, so the total may not add up to $18 trillion.
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