QEII: Who really owns US Treasury Debt
by Bruce Webb
Okay readers and Bears, give me a hand here, because some of our standard narrative on ‘unsustainable’ US debt seems to be turned on its head. The standard narrative is simple: we have $13 trillion in US Treasury debt, and most of it, or at least the new issuances are dependent on the Chinese Central Bank continuing to purchase that debt. Which in turn has led to such things as that new ad; How Great Nations Fall: “Now They Work for Us”. Well how does this actually stand up to numeric scrutiny?
Okay the first place to start is Treasury’s Debt to the Penny web application where we are dutifully told that total ‘Public Debt’ is $13.723 trillion as of close of business Tuesday Election Day. But as Bear readers know that total is broken into two sub-totals ‘Debt Held by the Public’ and ‘Intragovernmental Holdings’ with the respective totals being $9.133 trillion and $4.590 trillion. And of that latter we know that $2.6 trillion is held in the Social Security Trust Funds. Now some opponents of Social Security claim that the Trust Funds just hold ‘Phony IOUs’ which on their logic means that they, and so presumedly the rest of ‘Intragovernmental Holdings’ are not really debt at all and really should be using the $9 trillion as ‘Real’ debt. But even without assenting to this phony argument it is true that Special Treasuries are not marketable. Which doesn’t mean they don’t have value but does ensure that they will never flood the market which only has theoretical access to the $9 trillion in Regular treasuries in current circulation.
Of that $9 trillion how much is actually owned by foreigners and specifically the Chinese Central Bank? Well we need to turn to another Treasury tool: Foreign Holders of US Treasuries where we find out that total foreign holdings are estimated at $4.213 trillion of which $2.772 are considered ‘Foreign Official’ , that is presumedly foreign exchange reserves by various central banks, while total Chinese mainland holdings are $868.4 billion. Now we could argue whether we should add Hong Kong’s total of $137.8 billion to that or ask with Brad Setser how much of holdings in ‘Carib Banking Centers’, the Channel Islands offshore banks included under ‘Great Britain’ or the traditional havens for safe money of Luxembourg and Switzerland are really held on behalf of China but I think we would be hard pressed to come up with a total of more than $1.1-$1.2 trillion held by Chinese private and public entities. Which is less than 10% of total ‘Public Debt’ and perhaps 13% of ‘Debt Held by the Public’. This is hardly an ‘ownership’ position. Plus if we look at month to month totals we see that ‘Mainland China’ holdings are down significantly from their peaks last fall at $938.3 billion even as total foreign holdings are up $636 billion over that time. Meaning that contrary to popular belief not all of our financial eggs are actually in a Chinese basket, other countries are stepping up to the plate as needed.
But Chinese holdings are just the background for this post which was inspired by some really provocative numbers in this NYT story this morning: Fed Will Buy $600 Billion in Debt, Hoping to Spur Growth. When we put the numbers in this article in the context of the numbers, a new and startling narrative starts to emerge. But you will have to chase this post under the fold to see it.
The starting point are these three grafs:
The Fed said it would buy an additional $600 billion in long-term Treasury securities by the end of June 2011, somewhat more than the $300 billion to $500 billion that many in the markets had expected.
The central bank said it would also continue its program, announced in August, of reinvesting proceeds from its mortgage-related holdings to buy Treasury debt. The Fed now expects to reinvest $250 billion to $300 billion under that program by the end of June, making the total asset purchases in the range of $850 billion to $900 billion.
That would just about double the $800 billion or so in Treasury debt currently on the Fed’s balance sheet.
Time to break out that four-function calculator: After subtracting $4.590 trillion of mostly unmarketable ‘Intragovernmental Holdings’ we are left with the $9.133 trillion of ‘Debt Held by the Public’. Of that $2.772 are in ‘Foreign Official’ of which some (large?) percentage will be in essentially irreducable foreign currency reserves by the various Central Banks, leaving maybe as little as $7 trillion actually exposed to the market on any given day minus whatever is held by various private entities and sovereign wealth funds in the typical ‘flight to safety’ function of U.S. Treasuries. Now what the NYT is telling us is that the Fed ALREADY holds $800 billion of that and is prepared to purchase some $900 billion more over the next year putting it on track to holding around 25% of the total market for Treasuries. Which by my calculations will make it the second largest creditor of the Federal Government after Social Security. But where Social Security mostly contents itself it taking its interest payments in the form of Special Treasuries, i.e. the government’s own paper, the Fed turns over all its profits from operations over to the Treasury, which in this case includes all the interest on the near trillion dollars in debt they are buying.
In the face of all the screeching by the deficit hawks about unsustainable debt and debt service and $13 trillion and our children and grand-children what are the implications of between Intragovernmental Holdings and the Fed balance sheet that more than half of that debt is held by the Federal Government or its Agencies (of which I am going to count the fed as one). Are all of those folk who claim that ‘Governments can’t really owe themselves their own debt’ in relation to Social Security simply willing to discount ‘real’ debt by 50% and more? Because apparently the Fed is confident enough in its and the Treasury’s credit that it is willing to snap up a full eighth of current Debt Held by the Public in purchases on the open market.
I don’t know what all this means, as I have said before I am a number pointer and not a number cruncher, but these numbers seem pretty eye-opening to me. Crunch away me hearties!
(BTW this also raises questions about the so-far Invisible Bond Vigilantes. After you subtract out ‘Intragovernmental Holdings’, the Fed balance sheet and ‘Foreign Official’ you start to see a ‘tail wagging dog’ story emerging, who exactly do you make a run on the dollar when the Fed is offering to buy pretty much everything you are willing to sell?)
There you go again – being logical and shit.
The deficit is unsustainable because it just is. The Chinese own all our debt and social security is busted, broke. Any attempt to say anything else will simply be met with references to Egeypt’s river.
Bruce,
Without reading your article I guess the answer to the question is:
China!
Do I win a prize? 🙂
I’ll read the article now.
Islam will change
The deficit is not a problem now. That is not, however, reason to claim that the Fed is purchasing Treasury debt because of confidence in the solvency of the Treasury. The Fed is doing it because that’s the Fed’s job. If Treasury defaults, the Fed will have bigger problems to worry about than whether it has bad assets on its books. Given that, the Fed is free to do what it needs to do to make things better now. It’s some other game, played under some other guy, if we ever start to worry about the Treasury defaulting.
Bruce,
Nice article. So in summary, we, the people, mostly own the debt. Big surprise there.
Though I would point out that even if China owned 100% of that $9T public debt they still wouldn’t own us. Two reasons 1) The old adage about if you owe the bank $100 your in hot water, but if you owe them $100 Million then the bank is worried… and 2) USN.
I also applaud your continual effort to squash the SS treasuries are not real debt crap. Your and coberly’s efforts, through my education on the subject, has led to two more wealthy friends understand the issue and reverse 100%. Took me 5 minutes on the 4th tee. I also educated 8 HS seniors who had bought into the myth that SS would not be there for them this last weekend. Once they understood the concepts, they quickly figured the rest out.
But all that assumes the Obama catfood commission goes quietly into the night…
Islam will change
Well with one correction: neither the more radical segments of the left or the Ron Paul brand libertarians of the right would agree that the Fed in any sense equates to “We the People”. Go far enough left or right and you come up with agreement that the Fed, the World Bank, the IMF and international banking in general are the real enemy of the people. Neither extreme is going to like the implications of the Fed specifically owning us, particularly given its governing structure.
“Visions of Bilderbergs dance in their heads”.
So why the big fuss all the time about raising the “debt limit”….if the true debt is 30% less than the authorized level. Lots of funny business here. Anyway, seems as if Ben is buying close to 100% of the deficit over the next several months….is that a coinkydink?
Jimi you do realize your content is being blocked and only moderators can see it? (And maybe you).
‘Debt Held by the Public’ does NOT include ‘Intragovernmental Holdings’ and DOES include ‘Foreign Investors’. Your categories are not correct.
Btw, one way to think about the trusts is dedicated set asides for future liabilities. Kind of like a company writing off future liabilities. Of course due to the whim of congress, there are only liabilities that congress appropriates….no one is guaranteed SS anymore than Boeing and Lockeheed are guaranteed purchases of airplanes. And I don’t think the “accumulated interest” on the trusts is in there? But probably we should find the PV of all future liabilities, and call that debt too. Why not? A defense trust fund, higher education fund, etc. etc. Just get the PV of all our future liabilities. Why limit this accounting to SS? I guess its parallel to companies using leasing to hide debt.
Reasonable enough. But correct me if I am wrong but I don’t think that just because large portions of ‘Debt Subject to the Limit’ are on the books of Social Security and other Trust Funds and on Fed balance sheets does not make those dollar values exempt from the limit.
We are potentially facing an odd situation where Republicans refuse to raise the debt limit and so let the Treasury be able to roll over maturing Treasuries but where the Fed is stepping up and buying just about to mature Treasuries at face value.
It would be an odd kind of default where the Treasury couldn’t borrow from the public to redeem maturing Treasuries but could direct holders of those Treasuries over to the Fed. The whole thing makes my head hurt. People tend to throw up their hands in horror at the very concept of monetizing the debt, but when interest rates are at the lower bound where is the harm?
(Which is why I put this post in the form of a question, this combination of Republicans threatening to slam shut the debt ceiling and the Fed freely purchasing Treasuries on the open market would seem to put us in uncharted waters.)
I think I follow the argument, but when the Fed buys the $600 Billion it is giving the seller dollars which are simply printed by the government–literally or figuretively –without any corresponding good, service or tax dollar to back it up, which is where the concern about inflation comes from because you are debasing that dollar’s value and if I am right is what is referred to as “monetizing the debt” While the stock market is up today is that because the shares of IBM are worth exactly the same as yesterday but now that translates to $1.02 rather than a $1.00 yesterday? And if so then the barrel of oil we could import for $82 yesterday now costs $83 and change? Do not get me wrong–I do not think inflation is a huge problem at the moment, but I do not think we should kid ourselves about what is going on to suggest that the debt does not matter because we own it. Further, in 2017 or thereabouts- if and I admit it is a big if– Paul Ryan and the Catfood Commission do not get Obama to bend over and sell out every American who works for a living, a number of senior citizens are going to be getting the proceeds of the special treasuries and presumably they are going to want dollars and not the special treasuries themselves. Is the government going to raise taxes to get the funds to cash out the special treasuries? Are we going to sell bonds to China for cash to redeem the special treasuries? Are we going to print more dollars to replace the special treasuries with cash? Or are we going to screw the Baby Boomers and tell them that under the new GOP austerity program instead of getting a social security check they are getting coupons for cat food which, if it is made in China will kill them quickly thereby saving Medicare for future generations?
Bruce,
Well the Fed is basically part of the government…but I see you point.
And I have no time for the Bilderbergs/Illuminati/Aliens out there…how many people beleive Elvis is still alive??? 🙂
Islam will change
Let’s take this to the logical extreme–if the Fed buys up all the Treasury debt, we no longer have a deficit problem. . .
We will, however, have an inflation problem.
Bruce, Are you not troubled when the Fed gobbles up debt? When they print an extra 900b? This is monitzation of the debt. The Fed has agreed to purchase 900b That is about the same amount of new debt that Treasury will issue.
You seem a bit amused and enthusiastic at this. I also see the similarities between the Fed and the intergovernmental AC.
I think this will prove to be destabilizing at some point. Markets roll over debt. They don’t really ever get cashed out. But the IG and Fed holdings will not be rolled over. The Fed will concentrate their purchases in 2-7 year maturities. So in about three years it will start to come due. And “somebody” else will have to come up with the money. Like the Chinese, but as you point out they are actually reducing their holdings.
SSA has turned from a cash giver to a cash taker. The rest of the IG is in the same or worse condition. The idea that we can just print our way out of this box troubles me.
Sometime next year you will be paying $4 for gas. Groceries of every kind will go up by surprising amounts (they already have in the futures market). The price of jeans may double at the Wal-Mart next year. Cotton is at a 125 year high. The dollar is weak because of the Fed activity. Everything we import will be gong up in price. We import everything.
Interest rates are already at record lows. There is no loan demand. The Fed’s buys will not change that. I hope you have all your money in stocks. This is what Bernanke said in the WaPo today. But if you are a prudent man and saved some money outside of stocks you will get no return for next few years. So if you are not fully invested you better go quick.
I am of course jesting. Betting all your eggs on the stock market is a bad risk. Better you should buy gold.
Making your savings worthless and forcing you to buy stocks as cure to the unemployment problem is bad Mojo Bruce. I think you know that.
pete
while it’s true congress can change the law and theoretically screw everyone, it’s not exactly by “whim.”
this is still a democracy, even if the people are stupid.
meanwhile, i tried to show a few weeks ago that even if the SS trust fund were stolen, the cost of paying for Social Security without it would still be too small to notice… and the people paying for it would get their money back simply by living as long as they are projected to live.
the difference between Boeing and Social Security in your example is that SS is owed a formal debt. That is not the same as guaranteeing purchase of airplanes. It is more like guaranteeing paying for the airplanes we ordered by contract.
terry
i think the theory is that the economy catches up with the money supply. you only get inflation if there is more money than goods and services. they hope that by putting the money in circulation they will cause more people to “create jobs.”
Well I would be delighted if it works out, but I fear that with the GOP in control of the House that Herbert Hoover in 1930 and FDR in 1937 are in charge and while I give Bernanke credit for trying to avoid Japan’s fate, I do not think it can be done by the Fed alone. Of course, if Obama would just let all of Dumbya’s tax cuts expire on schedule, announce a timetable to get out of Afgahnistan and slap a gradually increasing carbon tax on oil and coal extracted or imported into the country, I would feel a whole lot better but none of those are going to happen and I am very worried that he will join forces with the GOP to gut social security.
Terry the DI Trust Fund starting taking interest in cash in 2006 and principal in 2010, it is just that the dollar numbers though now quite large at $32 billion for 2010, did not require the kind of crowding out effects your comment suggests. Nor are the corresponding figures for 2017 much more significant. Now the transfers do get significant after 2026 and especially 2030 which is why Coberly and I suggest phasing in some revenue increases to buffer the impact and avert actual TF depletion. But 2017 is not in itself an important turning point.
Krasting why don’t you trust the markets? The bond market is telling U’s they anticipate deflation, if short term monetization of the debt puts inflation back on long range Fed target than why not. If and when the market starts signalling a concern about renewed inflation the Fed can make moves to tighten again. Your argument suggests that Fed action should not be tied to the market but instead the fears of pissy pantsed bond vigilantes.
Btw the future is not the sum of Krasting’s fears. You have an exaggerated faith in your own predictions, the conditional and subjunctive seem foreign to you, instead everything is “will” as in “gas will”. As if you actually know.
Or inflation right on the Fed’s 2% target.
Sure they may overshoot, but nothing says that outcome in inevitable.
Plus the article explicitly says “long-term” meaning 10 and 30 and not your 2-7.
kharris: “ That is not, however, reason to claim that the Fed is purchasing Treasury debt because of confidence in the solvency of the Treasury. The Fed is doing it because that’s the Fed’s job. If Treasury defaults”
I believe that the Treasury is constitutionally unable to default. Besides, it does not have to, as we have a fiat currency. 🙂
pete: “So why the big fuss all the time about raising the “debt limit”…”
To scare people, so that they will not object to gutting social programs. (The debt ceiling is the law, but from a time when we were on the gold standard.)
coberly: “while it’s true congress can change the law and theoretically screw everyone, it’s not exactly by “whim.”
“this is still a democracy, even if the people are stupid.”
Besides, our society is aging, and guess who votes. 🙂
terry: “when the Fed buys the $600 Billion it is giving the seller dollars which are simply printed by the government–literally or figuretively –without any corresponding good, service or tax dollar to back it up, which is where the concern about inflation comes from because you are debasing that dollar’s value and if I am right is what is referred to as “monetizing the debt”
If anything, the Fed is swapping gov’t liabilities upon which interest is owed for liabilities upon which no interest is owed. The net result, in strictly monetary terms, is for there to be less money growth. That should be deflationary, to some extent.
Let me be clearer. I do not ascribe to the monetary theory of inflation and deflation. More money does not necessarily mean inflation, and less money does not necessarily mean deflation. I my note I used those terms as though I did, however. I was trying to make sense in terms of the argument I was refuting.
Formal debt? New terminology in my book…can’t find it. Anyway the SS “debt” doesn’t cover the expected payouts in the long run so its a moot point…sumthin gotta give. Regarding the whim, whatever occured in the 80s seems whimsical to me. Using l think your logic they stole from me or violated a contract with me then, and I suppose they will repeat it again. But in BOLD LETTERS on my SS statement it says they can change it any time they choose, which to me is whimsical. However, please keep in mind that SS taxes are not investments…this is the most important point. They are a nice pro growth flat tax. That was the beauty of increasing it in the 80s…folks that don’t recognize that are silly…look at the 80s-90s growth. The flat rate should be extended to all income, hell raise it to 20% like Forbes and Pierre Dupont proposed, and drop the marginal rate since this just leads to tax avoidance.
pete
i guess you will have to get used to new terminology if you are ever going to have new thoughts.
the debt that congress owes to social security is a written down, legally binding debt. it is not a vague promise to buy more airplanes… or even a vague promis to provide a particular level of benefits… though that is certainly in a gray area between formal debt and moral obligation…
the Trust Fund does cover the expected payout over the Boomer retirement, and the current recession, which is what it was intended to do. Social Security is designed to be essentially pay as you go, and the “debt” really has nothing very important to do with it.
no one stole from you when they raised the SS tax in ’83. you have been paying the expected cost of your retirement… beyond the normal pay as you go formula due to the “generational inequity” implied by the size of your cohort. it is only a coincidence that the baby boom retirement is occuring at the same time we are expecting to live longer. as the “extra” boomer tax is being paid, another reason for raising the tax is occuring at the same time: you will live longer and so collect more benefits over a lifetime.
the SS statement is a political ploy to help the politicians undermine your confidence in SS. it is easier to take it away from you if you believe it is already gone.
when you go flat rate you lose me.
terry
i share your fear.
Krasting
I really don’t know anything about bonds, but it seems to me your fears for the future are more likely to be the result of structural mismanagemet of the economy than any particular policy re the bond market. The problem we are having is that the poor are too poor to buy, and the rich are too scared to invest, and all the jobs have gone to china.
and our poor dear silly president keep trying to compromise with the insane republicans.
only 4% of QE is committed to maturities 17-30 years.
Attempting to show a graph of our debt profile
Worked! As you can see we have little debt 10 years and out. The average life is 4+ years. The Fed is forced to buy the short end of the curve. That is where the supply is.
Krasting,
Wrong answer.
On November 2 at the Meeting of the Treasury Borrowing Advisory Committee Of the Securities Industry and Financial Markets Association, “Director Kim noted that Treasury continues to reduce some of the rollover risk embedded in the portfolio. The average maturity of the debt currently stands at 59 months, which is in line with the average observed over the last 30 years. Going forward, Kim indicated that this measure will continue to gradually extend further. He also noted that the percentage of debt maturing in one, two and three years are at historic lows.”
Bruce Krasting – “As you can see we have little debt 10 years and out. The average life is 4+ years. The Fed is forced to buy the short end of the curve. That is where the supply is.”
Let’s get the facts straight.
On November 2 at the Meeting of the Treasury Borrowing Advisory Committee Of the Securities Industry and Financial Markets Association, “Director Kim noted that Treasury continues to reduce some of the rollover risk embedded in the portfolio. The average maturity of the debt currently stands at 59 months, which is in line with the average observed over the last 30 years. Going forward, Kim indicated that this measure will continue to gradually extend further. He also noted that the percentage of debt maturing in one, two and three years are at historic lows.”
If I were pulling together a post about the Fed’s QE2 actions, I would consider including factual information extracted from the following news releases:
Federal Open Market Committee (FOMC) Press Release
Release Date: November 3, 2010
http://www.federalreserve.gov/newsevents/press/monetary/20101103a.htm
Statement of the Federal Reserve Bank of New York Regarding Purchases of Treasury Securities
November 3, 2010
http://www.newyorkfed.org/markets/opolicy/operating_policy_101103.html
Treasury Announces Marketable Borrowing Estimates
November 1, 2010
http://www.treas.gov/press/releases/tg938.htm
Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association
November 2, 2010
http://www.treas.gov/press/releases/tg942.htm
Statement for the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association
November 1, 2010
http://www.treas.gov/press/releases/tg939.htm
Federal Open Market Committee (FOMC) Press Release
November 3, 2010
http://www.federalreserve.gov/newsevents/press/monetary/20101103a.htm
EXCERPT:
“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.”
“Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.”
Statement of the Federal Reserve Bank of New York Regarding Purchases of Treasury Securities
November 3, 2010
http://www.newyorkfed.org/markets/opolicy/operating_policy_101103.html
“On November 3, 2010, the Federal Open Market Committee (FOMC) decided to expand the Federal Reserve’s holdings of securities in the System Open Market Account (SOMA) to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. In particular, the FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.”
“The FOMC also directed the Desk to continue to reinvest principal payments from agency debt and agency mortgage-backed securities into longer-term Treasury securities. Based on current estimates, the Desk expects to reinvest $250 billion to $300 billion over the same period, though the realized amount of reinvestment will depend on the evolution of actual principal payments.”
“Taken together, the Desk anticipates conducting $850 billion to $900 billion of purchases of longer-term Treasury securities through the end of the second quarter. This would result in an average purchase pace of roughly $110 billion per month, representing about $75 billion per month associated with additional purchases and roughly $35 billion per month associated with reinvestment purchases.”
“The Desk plans to distribute these purchases across the following eight maturity sectors based on the approximate weights below:”
Nominal Coupon Securities by Maturity Range
1½ -2½ Years – 5%
2½-4 Years – 20%
4-5½ Years – 20%
5½-7 Years – 23%
7-10 Years – 23%
10-17 Years – 2%
17-30 Years – 4%
TIPS 1½-30 Years – 3%
*The on-the-run 7-year note will be considered part of the 5½- to 7-year sector, and the on-the-run 10-year note will be considered part of the 7- to 10-year sector.”
“Under this distribution, the Desk anticipates that the assets purchased will have an average duration of between 5 and 6 years. The distribution of purchases could change if market conditions warrant, but such changes would be designed to not significantly alter the average duration of the assets purchased.”
“To provide operational flexibility and to ensure that it is able to purchase the most attractive securities on a relative-value basis, the Desk is temporarily relaxing the 35 percent per-issue limit on SOMA holdings under which it has been operating. However, SOMA holdings of an individual security will be allowed to rise above the 35 percent threshold only in modest increments.”
“Purchases associated with balance sheet expansion and those associated with principal reinvestments will be consolidated into one set of operations to be announced under the current monthly cycle. On or around the eighth business day of each month, the Desk will publish a tentative schedule of purchase operations expected to take place through the middle of the following month, as well as the anticipated total amount of purchases to be conducted over that period. The schedule will include a list of operation dates, settlement dates, security types to be purchased (nominal coupons or TIPS), the maturity date range of eligible issues, and an expected range for the size of each operation.”
“The Desk expects to conduct the November 4 and November 8 purchase operations that were announced on October 13, and it plans to publish its first consolidated monthly schedule on November 10 at 2:00 p.m.”
“Purchases […]
Treasury Announces Marketable Borrowing Estimates
November 1, 2010
http://www.treas.gov/press/releases/tg938.htm
Washington, D.C. — “The U.S. Department of the Treasury today announced its current estimates of net marketable borrowing for the October – December 2010 and the January – March 2011 quarters:”
“During the October – December 2010 quarter, Treasury expects to issue $362 billion in net marketable debt, assuming an end-of-December cash balance of $300 billion, which includes $200 billion for the Supplementary Financing Program (SFP). The borrowing estimate is $17 billion lower than announced in August 2010. The decrease in borrowing relates primarily to higher net issuances of State and Local Government Series securities and cash balance adjustments.”
“During the January – March 2011 quarter, Treasury expects to issue $431 billion in net marketable debt, assuming an end-of-March cash balance of $270 billion, which includes $200 for the SFP.”
“During the July – September 2010 quarter, Treasury issued $396 billion in net marketable debt, and finished the quarter with a cash balance of $310 billion, of which $200 billion was attributable to the SFP. In August, Treasury estimated $350 billion in net marketable borrowing and assumed an end-of-September cash balance of $270 billion, which included an SFP balance of $200 billion. The higher cash balance resulted from the additional borrowing.”
“Additional financing details relating to Treasury’s Quarterly Refunding will be released at 9:00 a.m. on Wednesday, November 3.”
Minutes of the Meeting of the Treasury Borrowing Advisory Committee Of the Securities Industry and Financial Markets Association
November 2, 2010
http://www.treas.gov/press/releases/tg942.htm
EXCERPT:
“Director Kim noted that Treasury continues to reduce some of the rollover risk embedded in the portfolio. The average maturity of the debt currently stands at 59 months, which is in line with the average observed over the last 30 years. Going forward, Kim indicated that this measure will continue to gradually extend further. He also noted that the percentage of debt maturing in one, two and three years are at historic lows.”
“The Committee then turned to the first question in the charge. Four general questions were posed by a member of the Committee to frame the discussion. First, what should Treasury do with nominal auction sizes over the coming quarter? Second, what should be the average maturity of the Treasury debt portfolio? Third, how should the Treasury think about bills in the portfolio? Fourth, what changes should Treasury make to the TIPS calendar?”
“Members noted that there was significant uncertainty surrounding the future of the Bush tax cuts and the economic growth outlook. Some suggested it might be prudent for Treasury to stabilize nominal coupon issuance for the next several months until clarity regarding the fiscal situation emerges.”
“With regard to the average length, several members of the Committee noted that if Treasury continued with its current issuance pattern, the average length would gradually increase from current levels. One member suggested that Treasury should issue significantly more 30-year bonds, despite some metrics that suggest that long-term issuance is expensive (i.e. the spread between 10- and 30-year yields). This member underscored that 30-year rates were near historic lows. Overall, the committee was comfortable with continuing to extend the average maturity of the debt.”
“The discussion about lengthening the average maturity of the debt led to a discussion about the size of the Treasury bill market. One member noted that bills were near historically low levels as a percent of the portfolio and that further shrinkage would be problematic for the bill market. Another member stated that negative bill rates ultimately benefit Treasury, because reduced bill issuance would most likely result in making longer-dated coupons and bank deposits more attractive to investors. Members agreed that Treasury should monitor the bill market going forward.”
“At this point, a member asked about the impact of the Fed’s potential quantitative easing (QE2), expected to be announced at the November 2010 FOMC meeting. The question arose regarding whether the Fed and the Treasury were working at cross purposes, given that Treasury is extending the average maturity of the portfolio while the Fed is expected to purchase longer-dated securities. The member noted that from an economic perspective, the Fed’s purchase of longer-dated coupons via increasing reserves was economically equivalent to Treasury reducing longer-dated coupons and issuing more bills.”
“It was pointed out by members of the Committee that the Fed and the Treasury are independent institutions, with two different mandates that might sometimes appear to be in conflict. Members agreed that Treasury should adhere to its mandate of assuring the lowest cost of borrowing over time, regardless of the Fed’s monetary policy. A couple members noted that the Fed was essentially a “large investor” in Treasuries and […]
Min,
My point was about attribution of reasoning to the Fed that is probably irrelevant to the Fed. I have no quibble with Bruce’s main theme. We ought always to strive to say what is right, even on the minor points.
Constitutional requirements are one thing, the mechanics of debt payment another. The fact that the US does not have to default in the abstract, and is requjired not to default by its foundational document does not mean the debt ceiling law is not a problem. Unless the Supreme Court is willing to overturn that law on an emergency basis, there is a reasonable chance that failure to pass a debt ceiling increase could lead to default.
And here I was just praying for the clarity provided by multiple press releases. Voila! Thanks for that.
Krasting did have his facts straight. As a share of outstanding Treasury debt, debt maturing in 10 of more years is a very small proportion, Treasury’s effort to extend the average maturity of its debt profile notwithstanding.
“I have no quibble with Bruce’s main theme. We ought always to strive to say what is right, even on the minor points. “
Then lets be consistent
“Unless the Supreme Court is willing to overturn that law on an emergency basis, there is a reasonable chance that failure to pass a debt ceiling increase could lead to default.”
Lets be consistent and not use “default” for all manners of not making a payment. If I owe you money, have the money and simply refuse to pay you I’m being an asshole. If I owe you money and dont have the money, I’ve “run out of money”.
The deficit terrorists are claiming we are running out of money when really we are just being assholes.
“The fact that the US does not have to default in the abstract, and is requjired not to default by its foundational document does not mean the debt ceiling law is not a problem. Unless the Supreme Court is willing to overturn that law on an emergency basis, there is a reasonable chance that failure to pass a debt ceiling increase could lead to default.”
Yes, the Reps could precipitate a constitutional crisis because of the debt ceiling law. It should be repealed.
I am not sure I subscribe to the monetary theory of inflation either, but I also am not sure I understand your suggestion that exchanging cash for bonds is deflationary or that the result of simply printing money to pay debt does not result in the devaluation of the dollar which while perhaps not inflationary per se will look like inflation to us versus the rest of the world–ie it is going to cost me more dollars to buy that barrel of Canadian oil or that Asian car or electronics. As a result I will try and get more dollars for an hour of my labor which is just as valuable as it used to be, but absent a raise is worth less to me. Now if you want to argue that it is not inflationary because labor has no power to push for higher wages, I will agree with you and perhaps that is why you argue it is deflationary because the net effect is a tax on labor and on those businesses which do not have pricing power.
QE is not adding any money to the economy it is simply an asset swap. The Fed is not allowed to add money thats a fiscal operation that requires congresses approval, just like a helicopter drop would.
having a “flat” tax has just about zilch to do with the reason that the social security tax system works well. The reason social security works with less evasion is because it is withheld from payrolls. Income tax that is withheld from payrolls also works fairly well. We get big cheating at the two extremes–“cash” contractors who don’t report and are commiting tax fraud and the wealthy who cheat about 25% of the time on the basis of their sold assets and are commiting tax fraud and the corporations that pay sharp minds to invent shelters so they can cheat on their taxes which may or may not be tax fraud since it ultimately depends on a court’s ability to understand the tax system well enough to give a coherent interpretation of it.
Sorry it is exactly the same vague promise. The debt will be exchanged for taxes, to pay for SS payments. Thus, only future taxes (of any stripe, flat 12.5% or progressive) will pay for SS. Just like taxes will buy airplanes or pay wages to government employees. And to be honest we could easily consider the PV of liabilities (future cash payouts) like buying airplanes, paying govt. workers, and writing SS checks, and balance this against the PV of future cash inflows (taxes). No need to treat SS differently, except the very few who wrongly believe that SS payroll taxes are investment in an annuity to begin at retirement. Ain’t true, never was (thought they lied about it). Payroll taxes were paying for current retirees, not a personal investment. And, all economists would agree that flat taxes are pro growth, without the disincentives of increasing marginal rates.
Oh, I wasnt saying the flat had anything to do with SS. I do not associate our taxes (payroll and income) with my SS benefits. Instead, I look at revenues, two parts, the 12.5% flat and then the progressive. These just go to the general fund. ANd there is some accounting gimickrly to talk about a trust fund, but that is nuts. ANd is used by some to try and limit SS payouts. This is immoral. The two are not linkind. Simply come up with equitable payouts, and efficient taxes. And flat rates are exteeeeemly efficient. So make it bigger, and broader, and reduce the marginal rates. But don’t keep lumping the taxes in with the payouts. Its not the law…hence its a rhetorical lie.
Gizzard: “The deficit terrorists are claiming we are running out of money when really we are just being assholes.”
Let’s get the right pronoun. Shouldn’t it be, “they are just being assholes”?
“Let’s get the right pronoun. Shouldn’t it be, “they are just being assholes”?”
Thank you for the correction.
terry: “I also am not sure I understand your suggestion that exchanging cash for bonds is deflationary”
Bonds bear interest. That means, if the economy and tax revenues remain the same, more money will have to be created in the future to pay the interest (or it will have to accelerate). By comparison, dollars do not bear interest, and so, under the same conditions, more money will not have to be created in the future. So if our measure of inflation is money growth in the future, money is less inflationary (more deflationary) than gov’t bonds.
OC, QE means to alter the conditions. 🙂
terry: “or that the result of simply printing money to pay debt does not result in the devaluation of the dollar which while perhaps not inflationary per se will look like inflation to us versus the rest of the world”
Our current policy is to increase exports over the near future. That will be hard to do without a weaker dollar, won’t it?
Well that is one way to get 51 comments on a post.
pete
if you put money in the bank and the bank pays you back later with interest, does that coundt as an “investment” in your lexicon?
because if it does, you may be startled to learn that the bank does not keep your money in a drawer. it uses it to pay for other things, gives it to other people.
when you pay your SS tax you are “investing” or “saving” the money in exactly the same way. what the bank (Social Security Administration) does with the money is pay back the people who “invested” earlier.
it’s not really that hard to understand.
pete
i am sorry. your theory of finance is somewhat half cocked. SS works like a pretty straigt forward business transaction. Think of buying an insurance policy. You pay your premium, and then you reach age 65 and you collect your “insurance.” Which in this case is more or less exactly what you paid in, with an added “interest” made possible by “pay as you go with wage indexing” which simply means that you get paid back according to the value of the dollar and the level of incomes at the time you retire… generally more than when you paid in. the insurance effect comes from the payout schedule which provides a supplement in case your payment (income)/benefits dont’ turn out to be enough to meet basic standards. the money for the supplement comes from paying out less to the people whose lifetime incomes are more than enough to meet basic standards. but because of the built in “interest” even those people get out more than they paid in.
you could probably understand this if you took the time to think about it. and were able to think honestly…. that, sadly, is not so easy. most people can’t do it.
I certainly can’t follow the higher math here. Can someone explain how we can buy our own debt?
The Fed is buying Treasury debt that has already been issued. With some complications, I think, the interest that the Treasury pays to the Fed the Fed returns to the Treasury.
Helluva way to run a railroad. 😉
But where does the money come from? If it has to issue debt because it can’t pay its own bills, where does the money come from to purchase its own debt? Except by printing money, and therefore the value of the money goes down, and commodities (oil, gas, cotton, food, etc.) goes up. Notice what is happening to the price of gas? Usually goes down in winter, as less miles are driven. Not this year.