If a Default, Who Gets Paid First?
China.
When the tax payer bailed out Freddie Mac and Fannie Mae in 2008, foreign central banks never lost a dime. At that time China had $376 billion in bond holdings. China was paid in full.
According to Bloomberg, China is the largest foreign owner of Treasuries: $1.28 trillion. Japan is second with $1.14 trillion.
The U.S. has run a sizable trade deficit with China; a much smaller one with Japan. Altogether, the U.S. Trade Deficit has been mind boggling. China used its trade surplus money to buy Treasuries from the U.S. In short, every month we owe our trading partners a great deal of cash.
Via multinationals like Apple, IBM, Nike (you name the company), we outsourced our production to third world countries. We then bought those goods, making a handsome profit for the companies and China. China took its share and bought bonds and T-Bills.
Yes, China will get paid first. Japan will get paid second. Other foreign banks will be paid. Social Security will be paid after bond payments. The rest of us will have to stand in line. And hope.
Stormy,
What you say is true; Treasury bond holders will be paid first. The reason is simple, and a function of our past policies: when you are $14T in debt and climbing, you need access to lenders.
I don’t necessarily agree that Social Security is second in line. It depends on the political calculus. Whoever screams the loudest…..
According to Bloomberg, China is the largest owner of Treasuries –
That’s not what the Bloomberg piece says.
I should have use the modifier “largest foreign owner.” Thanks for the correction.
When you outsource jobs to third world countries to save a buck, you need access to lenders. And when you cut taxes on those raking in corporate profits, then you need those lenders.
Gotta follow the train of causality back a bit, Sammy
I am more concerned with who does not get paid. The first on that list should be Congress!
China owes the US trillions…………..my guess debt write off which would suck, because those trillions owed to the US, are a nice weapon to have………..
John can you expand on that comment a bit?
Because as written it doesn’t seem to make any sense. Or at least is working off a different definition of “owe”. Help a brother out?
For others there seems to be a little switching in Stormy’s post between the first and second paragraphs. Obvious enough to him and most readers perhaps but worth highlighting.
Fannie and Freddie Mortgage Backed Securities (MBS) are NOT counted as part of Treasuries or Debt Subject to the Limit. In particular there is no relation between the $326 billion of what appear to be Chinese holdings of MBS’s in 2008 (my reading of “$376 billion in bonds”) and the very different $1.28 trillion in Treasuries. That is it is NOT the case that TOTAL Chinese exposure to ALL categories of US backed dept triple over the last five years, in fact Chinese holdings of Treasuries actually subject to the limit has been fairly stable and in recent years declining as Japan and China traded turns as the largest foreign holders of TREASURIES.
And for another point of clarification. The $1.28 trillion of Chinese holdings of Treasuries represents 7.6% of total US Debt Subject to the Limit (and so ‘Public Debt’ as defined). On the other hand it represents something like 12% of ‘Debt Held by the Public’ (which is a SUB-category of Public Debt). But whether you pick 8% or 12% the notion that the Chinese somehow hold the whip hand or are the only buyers of our debt is somewhere between overstated and ludicrous. Because by the numbers the Chinese are only keeping pace with the overall growth of this particular asset pool.
While I do not endorse (because I have not read) anything in this Report I am assuming the numbers in Figure 2 on page 6 are correct.
http://www.fas.org/sgp/crs/row/RL34314.pdf
They show that total Chinese holdings of U.S. Public and Private Securities has steadily gone up there has been a rough balance between Public and Private and if anything that balance is shifting against Public.
I mention this because some of the reporting has been not very diligent at distinguishing between Chinese Foreign Reserves held in U.S. Securities, Chinese Holdings in Federally backed or issued Securities and Chinese Holdings in Treasuries. These are in fact nesting eggs from the latter out to the former. Comparing them is not exactly like Apples and Oranges. More like analyzing a Roast Turducken. Leading to some confusion about which meaty layer you are actually sampling at any given time.
Actually there are no grounds for saying anythign about who gets paid first, and certainly not to the level of China before Japan before other bondholders, much less where anybody else is in the line. The law is that all persons, agents, bodies that are legally owed money by the US government for any activity whatsoever, holding a bond to get interest, being a legally defined recipient of some transfer payment, a governmnet worker owed a wage for work done, a contracter who has submitted a bill for legally contracted work, all those are supposed to be paid, and there is nothing at all in law or practice that provides any grounds for prioritizing any over others.
Beyond that, there is simply a technical matter of doing it. There are about 80 million payments per month, many of them done automatically, such as social security payments. There are apparently three different systems at the Treasury handling different kinds of bills, one for assets, one for defense, and one for all the rest. Most people at Treasury say they are not even technically capable of doiing any sort of fine prioritization, particularly on short notice, atlhough this is widely disbelieved, although it would appear that they have been able to figure out how to block wage payments, with these being blocked for all federal workers, btw, along with contracters’ bills.
I’d have to agree with Rosser regarding the Treasury’s ability to make even individual payment adjustments in the blink of an eye. Sign on to Medicare part B and watch how fast the monthly premium adjustment is made to your Social Security check. Faster than Medicare gets the order of primary vs. secondary insurer correct I’d guess.
Going back to the point of Stormy’s post. It seems quite obvious that the Social Security Trust Fund is the first in line if total Treasury note assets are the determinant factor. The Trust Fund holds about $2.7 Trillion. And if the dick heads in the Congress are allowed to screw with the benefits formula that first order position of the Trust Fund will only be reassured as its size grows as benefits shrink. We have certainly got some dumb ass Congressional representatives.
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