Public vs. Private Debt: The Long View
Poking around in FRED while thinking about money created by banks and by government, I came up with the following graph, which I found to be pretty eye-popping:
Federal Debt Held by the Public as a Percentage of Total Credit Market Debt Owed
That’s a pretty profound secular shift. But far from delivering any obvious conclusions for me, it raises several questions.
• First, what’s included in TCMDO? (Is there a glossary of these measures available somewhere? I haven’t been able to find one.) I assume government bills and bonds are included — including those held by the Fed. I assume it does not include bonds held by the Social Security trust fund — nonpublic debt. (Or does it?)
• Since financial industry debt is “different,” what does the graph look like if we exclude that?
Federal Debt Held by the Public as a Percentage of (Total Credit Market Debt Owed – Financial Sector Debt Owed)
• Should we adjust for credit-market instruments held by the Fed?
• Are there more illuminating measures to display in this graph?
• What does this say about the stock of “safe assets” in the economy?
• How does this relate to JKH and Steve Waldman’s notions of government money (created through deficit spending) as “leverage” — in Michael Sankowski’s words: “JKH points out (S-I) is like the denominator in leverage. When (S-I) [govt deficit spending plus/minus trade imbalance] gets too small compared to S or I, then the private sector steps in with private creation of S. But these claims aren’t always as credible as government NFA. Plus, private sector S can sometimes be marked to market in ways which makes valuation difficult.”
Sorry to be so inconclusive. As always I’m hoping to be educated by finer minds than mine.
Cross-posted at Asymptosis.
The Treausry in its infinite wisdom deploys two terms of art: ‘Public Debt’ and ‘Debt Held by the Public’ with the latter being a component of the former and the former what we mostly know as THE Federal Debt as for example tracked by the famous debt clock in Times Square.
Treasury is normally pretty precise in its own usage and so I suspect these graphs do not include the roughly $4.5 tn in Intragovernmental Holdings that with Debt Held by the Public sum as Public Debt. But you would have to poke at the numbers to be sure, a task generally beyond the powers of most of the economic and business press.
And as you note the whole thing is bollixed up by so-called ‘Debt Held by the Public’ actually in the hands of the Fed as well as (I would argue) whatever credit instruments member banks have parked at Fed banks as some or all of their legally mandated reserves.
As the King of Siam said in the musical “It’s a Puzzlement’
Err, is that chart a percentage chart or a proportion chart? It’s a little hard to believe that total credit market debt is more than 500 times the Federal debt.
If the image loads correctly it will show the ratio of total federal debt (~ $15T) to total debt publican and private. The ratio hit a low of .18 in 2007 just prior to the recession and has been rising since. Not unexpected, I guess, as it indicates the private sector has been de-leveraging while the federal debt has been increasing.
@Min:
It’s one divided by the other. So .45 = 45%.
Thanks, JPF.
GFD isn’t all that interesting in this context, it seems to me. And I’m still wondering about the constituents of TCMDO.
As I suspected, it is proportion, not percentage. 🙂
The break down of TCMDO can be found here:
http://www.federalreserve.gov/releases/Z1/Current/
I’m pretty sure TCMDO only includes the portion of the federal debt that has been marketed.
Why do you say financial debt is different?
banks don’t create money.
when default on the loaned money occurs it’s clear bank money is not real money, rather it’s just someone’s savings in two places at once.
How is it clear that when there is a loan default , that is not real money? The loss (what is not covered by sale of collateral) comes
out of the bank’s pocket. Are you saying the bank’s capital is not real?
Thanks Jim. Line 8 of Table L-1 does not give a breakout of which federal government liabilities are included. The levels (as suggested by Bruce) suggest that intragovernmental liabilities are not included.
I’d say rather that they create money, but in aggregate it’s unreliable money because the loans must be retired or defaulted. Not true with govt money. The debt keeps going up, at least long-term.
Steve,
If private debt exceeds public debt by so much then intuitively I would think the only way to deleverage or.satisfy the liabilities would be for the government to net spend in massive amounts, nearly tripling the national debt.
What is the option?
Up until 2008 private loans were rolling over and perpetually growing. Now total private debt has been shrinking but bank loans have not shrunk. Total bank loans and leases are the same as they were 4 years ago.
The other option to the federal govt. intenctionally levering up as the private sector levers down is massive widespread default on private debt. That of course will have the effect pf drastically reducing federal revenue, so the public debt would grow anyway.
Even if Congress tries to balance the budget and that forces much of the private debt to default the federal to private debt ratio will continue to move back to where it was at the end of WW2.