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?)