Fed Treasury Holdings, ‘Real Debt’ and ‘Real Debt Service’
It is not difficult to determine a dollar figure for Total U.S. Public Debt. In fact you have to round UP from the Treasury’s Debt to the Penny and Who Holds it web application which tracks that number daily. As of end of business Thursday that total was $17,472,051,696,926.14. Which is a lot of money however you slice it but doesn’t really get to the issue of ‘sustainability’. First this number includes Intragovernmental Holdings amounting to $4,993,180,664,362.07 which while are certainly full obligations of the U.S. government and backed by Full Faith and Credit or in fact obligations that are under the control of that government and are largely in held as rolling reserves for various programs that ideally will never be redeemed in full. For example over half of that $4.9 trillion is the $2.8 trillion held by the Social Security Trust Funds which, if prudent and necessary steps were taken to shore up its ‘sustainability’, might never have to be redeemed on net and indeed would need to grow over time. So it would make some sense for calculations of ‘Real Debt’ to use the remainder, which Treasury tracks under the name ‘Debt Held by the Public’. Which to my mind is too close to ‘Public Debt’. But it is what it is.
And what is it? $12,478,871,032,564.07. But even this doesn’t get us to a good measure of ‘Real Debt’ because it doesn’t address the issues of Rate, Maturity and Term. To take this to an imaginary limit, what if every penny of that $12.5 trillion was in 30 year Bonds bearing a Maturity ranging from 2039 to 2044 and carrying a Rate of 0.025%. Well whip out your Financial Caclulator and do some PV calcs and that wouldn’t really be ‘Debt’ at all. And in particular it would incur no ‘Debt Service’ in the meantime. Now take it to a different imaginary limit. Assume every penny of that $12.5 trillion was held in 6 month or 1 year notes at a Rate of 6.0% but was all held by the Federal Reserve. Well that would imply a HUGE amount of Debt Service. On the other hand the Fed rebates all profits to Treasury so the net effect would be Treasury writing a ‘check’ to the Fed that would be ‘signed over’ back to Treasury. So that too means no ‘Real Debt Service’ in practical effect.
Now we don’t exist in a world near either of those limits. But that doesn’t mean we shouldn’t net out Public Debt that is held by either Government Trust Funds or the Fed from ‘Real Debt’. And equally important we need to understand what portion of total debt service is ‘Real Debt Service’ that is payable to non-Federal entities out of actual tax collections. That is we get exactly nowhere just stating: “The U.S. has $17 trillion in Public Debt”. Instead we need to have a grasp on the questions of “Debt to Whom? At what Maturity? At what Rate?” before we can put our fingers on ‘Real Debt’ and ‘Real Debt Service’. Answering those questions would require more than a single blog post and comment thread, but I suggest we start by looking at Fed Treasury Holdings under the fold.
The New York Fed maintains a website called System Open Market Account Holdings which gives totals and subtotals for that account’s holdings of Federal instruments including Bonds, Notes, Bills, TIPs, Agency Securities, and Federal MBS. And we can see that after several rounds of Quantitative Easing (QE) this adds up to a fairly staggering portfolio of $4,017,101,832,900. Not all of this is counted as Public Debt, that I think would be confined to the totals of Bills, Notes, Bonds and perhaps TIPs which together give us sub-totals of $0, $2,244,872,848,800 , and $95,389,037,400 for a approx total of $2.3 trillion. Which if subtracted from the $12.4 trillion of ‘Debt Held by the Public’ gives us a first cut at ‘Real Debt’ of $10.1 trillion.
Now that is a useful number to have. In particular it gives us something to directly compare to the numbers in the following table maintained by Treasury: MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES which in turn tells us that the total so held is $5.9 trillion. Which in turn could spark some useful discussions. But I want to start a hare in a different direction and start looking at ‘Real Debt Service’ which requires asking “Who holds what percentages of Treasuries along the current Yield Curve?” And more precisely “What was/is the effect of Fed QE on ‘Real Debt Service’?”
Hopefully the experts will fill the following in but on my reading the short version of QE was “Buy long to drive down short”. But this also had the effect of “Buying old to drive down new”. And since the combination of “old” and “long” adds us to “high coupon rate” (because long bonds issued a decade ago have much higher coupon rates than newer ones) this suggested to me that QE had the inevitable effect of driving down what I am calling ‘Real Debt Service’ by soaking up the pool of higher yielding long bonds. But how strong is this effect? What proportion of the Budget line item(s) devoted to Debt Service are actually flowing to the Chinese and to overseas Oil Producers? Well we can get a start by examining the sub-Tabs on that NY Fed SOMA Holdings site.
If you click on the Tab called T-Notes and T-Bonds you will see along list of holdings sorted by Maturity Date with the third through fifty columns giving Coupon Rate, Par Value, and % of Outstanding. And it all makes for fascinating reading, at least if yu are into this sort of thing. Now as you cast your eye across the columns it is pretty easy to distinguish Long (<10 years) from Medium and Short, the former having Coupon Rates above 6%, indicating Long Bonds issued before the crash. And if we cross compare the issues with 6%+ Coupon Rates with the column giving % of Total Outstanding some eye-opening results appear. For example if we take the issue maturing on 8/15/2017 with a coupon rate of 8.875% we see that fully 56% of all such outstanding are held by Fed SOMA. Or take the 8/15/2020 with coupon rate 8.750% where the % of outstanding held by the Fed hits 70%, which on inspection seems to be the Feds self-imposed limit. And which is pretty consistent starting with the 2019s. Anyway I'll turn this over to you all. But to summarize my preliminary conclusions: One - the best measure of 'Real Debt' is as a first cut 'Debt Held by the Public' minus 'Federal SOMA Holdings' or $12.4 trillion minus $2.3 trillion. Two - any estimate of 'Real Debt Service' has to take into account that the roughly 15% of 'Debt Held by the Public' held by Fed SOMA includes up to 70% of the highest Coupon Rate instruments out there. Three - it just won't do to take 'Total Public Debt' and then multiply that by average Coupon Rate to get some idea of what it takes to carry U.S. Debt. That number is basically meaningless. As to a lesser degree is the metric 'Total Public Debt' itself. If we really want to get to a place where we can measure sustainability of national debt we just can't start from R-R type calculations of Debt as % of GDP. Instead we need to do some work examining that debt through the lenses of Rate, Term, Maturity and perhaps most importantly 'To Whom?'
What do I mean by ‘Real Debt’?
‘Real Debt’ is debt whose principal is expected to be paid back ON NET and/or which incurs ‘Real Debt Service’.
What then is ‘Real Debt Service’? Well it is service on debt that results in transfers from the outside. For Public Debt ‘Real Debt Service’ mostly comes in the form of tax collections.
For example are the Social Security Trust Funds made up of ‘Real Debt’? Well that depends on policy going forward. If we adopt sensible ways of shoring up Social Security finances (whether through phased in FICA increases or cap increases) then it turns out that Trust Fund principal would never need to get redeemed on net. On the other hand under conditions of ‘Sustainable Solvency’ as defined a portion of interest on those TF securities would have to come in the form of transfers from the General Fund, that is ultimately from taxpayers.
Which would make the SocSec Trust Funds ‘Real’ but ‘Discounted’ ‘Debt’.
Now withOUT those sensible ways of buttressing up SocSec finances current projections would have all TF principal and all interest having to be paid down and off by 2034 or so. So under current law and projections SocSec Trust Funds represent ‘Real Debt’ as defined. Under alternate projections and revenue assumptions perhaps not.
Boiled down to Talking Points.
An Austerian tells you “You are just passing $17 trillion in debt onto your children and grandchildren”
My reply: “Well no. First you need to subtract out $5 trillion in Intragovernmetnal Holdings which need not and indeed should not be paid off (as to principal). Second you need to deduct the $2.3 trillion currently held by the Federal Reserves SOMA, because paydown and interest on that gets rebated to Treasury. Moreover that $2.3 trillion includes nearly 70% of all debt 10 years and older, meaning that most of the remaining $10 trillion is due in the relatively short term. So really we are only passing on 30% of long term debt, or a fraction of the total you are citing”.
Austerian: “Pshaw! You know as well as I do that most of that $10 trillion will just be rolled over ad infinitum”.
Me: “Well maybe, but more and more of that $10 trillion is carrying coupon rates at or below the long term inflation target. Maybe you should try some PV calculations.”
That is Real Debt has a much shorter term and rate curve than Total Public Debt and calculations of the sustainability of that need to go deeper than simply doing a R-R ‘debt as percentage of GDP’ one.
Average Interest Rates
Hmm. Across all categories of marketable Treasuries the calculated average rate is 2.007%. But this includes a 5.01% rate on Treasury Bonds of which up to 70% of many issues are actually held by Feds SOMA.
Notes: 1-10 years, Bonds 20 or 30 years.
http://www.treasurydirect.gov/govt/reports/pd/mspd/2014/opds042014.pdf Treasury Monthly Statement of Public Debt
Bonds: $1,463,107 million or $1.5 trillion of long-term Debt Held by the Public. Of which maybe 60%+ is held by the Fed directly in its SOMA Account.
Maybe we haven’t mortgaged our kids future to the Chinese Central Bank after all.
Very nice graphs on Debt Distribution as to Principal and Interest.
Note the Principal Ratio of Notes to Bonds is 8.0/1.4 or 5.7:1
while the Interest Ratio of Notes to Bonds is 82:41 or 2:1 with solid chunks of both but certainly some 60% of the latter going to the Fed and so ultimately back to Treasury.
Looks to me like we are carrying some $17 trillion in Total Debt for a total ‘Real Debt Service’ of around $100 billion a year. Not chump change, on the other hand on the order of 0.6% of GDP and about the same in terms of effective interest rate.
Thanks for bringing perspective to this issue.
In my opinion, the real shame of our generation is not that we are leaving our children a large debt burden to be serviced (and, since we are monetarily sovereign, we will always be able to service); but that we are, through fear of accumulating debt, also leaving them with a country in need of repair. Its sort of like eating our “seed corn.”
What doesn’t get factored into a financial analysis of the debt, and debt service, we are passing on are, in Larry Summer’s words, the “repressed budget deficits.” The future generations are going to have to repair the infrastructure we leave in disrepair. And because we have let things run down, they are going to start with a handicap.
Piketty points out that accumulated national wealth (capital) runs five to seven times annual national income — which fraction is about where national debt tends to be. Just something to put the debt in perspective — at least for us working stiff types who can then see it as a little less alarming in that light (okay; salesmanship, not philosophy).
Piketty also points out that government owned capital runs about equal to national debt in most places. He then points out that most national debts could be cancelled by selling off all government owned property, hospitals, schools, office buildings, etc. — and then renting it all back.
We are a long way in that direction in Chicago where we recently leased out our parking meter system for $1.15 billion — comes to $15 million a year for 75 years (or until flying cars). Slight hitch turned out to be that the city has to pay the lessee $15 million a year for missing revenue due to street closings, construction, etc. Also another $10 million a year to make up for handicapped parking — which quickly eliminated handicapped meter parking. Lessee taking in $125 million on hiked rates.
Can’t get out of the lease because of the US Constitution prohibition against government invalidating contracts. A legal effort is being made on the basis the city can’t legally sell its police power (good luck). With Piketty scenario in mind — and an endless prospect of this in the future — I would try recapture city property via the eminent domain. Given the scary scenario the courts could conceivably could see a “practical” balance.
Next property on the table is supposed to be Midway Airport — which will then be leased back I presume.
Got off topic but couldn’t help it.
To get back on topic: Piketty also points out that a wealth tax of 5% a year (25%-35% of the level of annual income/national debt) could quickly clear up most national debts theoretically — if you taxed all wealth including people’s homes. Something like 1% of all wealth over — pick a number — would be a practical possibility.
Some years back, Donald Trump is supposed to have said that a 14.5% tax on all wealth over some high number could pay off the national debt.
Denis but that just leads to my second major question.
What is the minimum amount of U.S. Treasury Debt needed just to keep the world economy working given its multiple roles as reserve and ‘flight to safety’? After all the U.S. dollar can’t serve as the world’s reserve currency if all that is in circulation is actual currency. I mean flying in pallets of Benjamins may work for the purposes of Afghan Warlords and S. American Drug Lords but mostly you need more convenient instruments of exchange and collateral. No doubt that sweet spot is somwhere below the $12 trillion of Debt Held by the Public but how far below.
As a slightly different example we can take the Social Security Trust Funds. In order to maintain a state of ‘Sustainable Solvency’ as defined requieres that the Trust Fund maintains a level of reserves equal to one year of cost going forward. Although the current Trust Fund is well in excess of that amount it is not in excess of the requirements of 10 years from now. That is we could keep the nominal Trust Fund balance steady, and so making up $2.8 trillion of that total $17.4 trillion of Total Public Debt going forward, and find ourselves in a position where we would have to increase future Trust Fund balances to maintain ‘Sustainable Solvency’. Ultimately the ‘debt’ needed to meet this reserve requirement needs to be in the 10s of trillions of current dollars simply as a function of program growth due to population increases and nominal inflation.
And similar requirements exist for Debt Held by the Public. Just not set out in such an explicit way. That is a different way a approaching the question of ‘Real Debt’. If we can only reduce total Public Debt so far without destroying the world’s economy then the equilibrium level above that is the bottom limit of ‘Real Debt’.
i hope picketty is not suggesting a wealth tax, or selling government “assets.”
those assets will be worth far more to the people than the taxes they “save.”
as for taxing wealth, i don’t like it. it means that when i retire and have no income the government can come into my house and start taking away my furniture. it’s a ticket to being eaten alive by the government.
and however much i believe in taxes and government, i don’t want to give them a way to eat me alive.
what’s wrong with taxing income… the taxes can always be figured into the cost of the transaction and business will be essentially unchanged.
taxing wealth, though, is very much more like the armed robbery the Randians and their friends call all taxes.
to make it clearer: what’s wrong with just paying for what we buy? i understand the point of “mortgages”.. debt… what i don’t understand is the idea that somehow we never, never have to pay taxes to pay down the debt. instead we just need to cut the “size of government.” that is, destroy any possible good that government can do for us. the reason government was introduced into the affairs of men.
Coberly: I see neither a wealth TAX or much of an increase in INCOME TAX on the higher incomes in the near or far future. Its the present political climate, the rich will get richer, the poor, poorer. These trends change through great political upheaval which doesn’t appear to be upheaving anytime soon.
Leaving other (Piketty posed problems) aside, like the richest being least affected by inflation because they invest best (confiscatory tax could take care of that), any harm in your view in reducing public debt via higher (5%?) inflation, like Post WWII.
Only being theoretical about across the board wealth tax — would be a wealth(y) tax. Remember, wealth tax rate multiplied by accumulated wealth being many multiples of annual income.
Centralized bargaining — when it gets here and it will — will be a case of take it easy, but take it — no need for social upheaval.
Denis given that current average interest rates on Treasuries is sitting at 2.007% BEFORE making any adjustment for Fed Holdings I am not seeing the case for special efforts to reduce nominal debt by encouraging inflation or anything else.
That is I suggest the correct metric for debt is ‘Real Debt Service’ which on my reading is running about $100 billion a year, not that big a price to keep the U.S. As the unofficial world reserve currency and so (in my opinion) the only reason why MMT folk’s arguments about ‘sovereigns’ and their ability to finance debt in their own currency makes sense. That is the missing or silent assumption in their arguments is that our Credit is good and so we are able to be Sovereign. Where their surface argument seems to have it the other way around.
In any event I see no reason to inflate debt away which is currently being financed at the target rate of inflation anyway. Now policies that might result in higher nominal inflation rates may well be good in their own right. For example I would support any policy that boosted labor share even if that created increased demand for certain goods and so exerted upward pressure on certain prices. On the other hand there seems to be enough supply slack that higher wages might not have that much inflationary effect. But all that is outside the scope of this post.
if i understand your point about a “wealthy” tax, i still have to object.
the wealthy need to pay taxes. higher taxes if the debt is too high. they are not hurting, are not going to be hurt. higher taxes are NOT going to slow growth despite the lies they tell themselves.
but i do not like the idea of a “wealth” tax… taxing what people already have. some form of “income” tax makes sense.
but i really worry about the rather well to do middle class folk who say “tax the rich but don’t tax me.”
i even worry about the poorish folk who say something similar. most of us… even us poorish… are wealthier than kings of just a few centuries ago. we can pay a few percent of our income to keep faith with, or shame, the rich into paying a fair share for the country that makes their wealth possible.
and the “leftish” people who say tax the rich but don’t tax me don’t seem to realize they are guilty of exactly what they accuse the rich of.
The truly amazing thing is that we can create all the dollars needed to meet the world’s requirement for reserve currency dollars, or to meet our own liquidity requirements, with just a few keystrokes. Bernanke himself admitted this. We do not have to tax anyone. In a fiat monetary system all money is created from nothing. The real question is why we tie our shoes together and insist on financing deficit spending with debt instead of just creating the dollars to fund it. (Though we accomplish the same thing by having the Fed buy Treasury debt in the Open Market, as has been pointed out.) The only difference between reserve dollars and treasury debt is that we pay interest to those who hold treasury debt, but not to those who hold reserve dollars (or we used to.)
On 1/1/2008 Debt to Public was 5.1T. On 12/30/2013 it was 12.3T – a 140% increase. It took a 100 years to get to 5T and just another 5 years to more than double it.
As far as I can tell, there has been no negative consequences as a result of this big run-up in public IOUs. Interest rates are still low, inflation has been tame, and stock markets have been strong.
The reason for this result is the Fed’s policies on QE and ZIRP. But QE is ending. It will be gone by September.
Then there is the question of ZIRP – how long will the Fed keep interest rates at zero?? The answer to that is most likely sometime in 2015. The real answer is that rates will rise when inflation rises above 2%.
How much might they rise? About 3% ( 2% inflation + 1% real return). When you look at the debt, about 2/3 will adjust to higher rates in a matter of a year or two – an average increase in the cost of debt of about a net 2%.
Ah, that would come to $340B! A big increase to swallow for an already strained budget.
Note on inflation – The MIT Billion Prices index has annual inflation above 2% – so by this measure interest rates should already be in the process of normalizing.
The index shows that the annualized rate of inflation in the past few months is at 6%.
I think the Fed party that made debt levels irrelevant is over. I wonder what the after-party clean up will cost.
The MIT index:
Krasting any Daily Index is going to show a lot of noise and if you pick a short enough period a striking visual.
But that same link shows last 365 days and last 30 that tell a much different story of steady state inflation fluctuating around 1%.
Sorry, I have call ‘Cherry Pick’ on this one.
On second reading I see it is worse than Cherry Picking
“The index shows that the annualized rate of inflation in the past few months is at 6%”
You have made a silent move from ‘prices’ to ‘inflation’ while ignoring the actual charts on the SAME page which explicitly report ‘inflation’ over that same time.
Rotten Cherry Picking.
Just for the record, I am a leftish middle-class person who has been saying that I (personally) don’t get taxed enough since Reagan. All the people that I know personally who complain about taxes are rightish – but then most of my relatives and friends are rightish so my sample is biased.
judging by comments here and on other leftish sites, i’d say you are among the few.
i am aware that the rightish are insane on the subject of taxes. what bothers me is that the left is only half insane: tax the other guy.
Coberly: EVERYONE PAYS TAXES of some kind or some sort, its expected in a civilized society, to be able to sustain said society in a civil manner.
Is enough being collected to do the job? Now that’s the question.
Also is that which is collected in fair and honest use?
If the answer to either is “NO” then the situation must be changed.
IMHO WE have two “noes” in OUR present situation.
No one ever “really likes” to pay them, that’s why WE have enforcement laws and people with authority to empower them.
Sadly, this nation has been lax in both those corners too.
This points to systemic problems that will not easily be overcome. Its very obviousness to the public at large causes more unwillingness to pay which feeds the cycle.
Just raising TAXES is not the answer and its an answer one most likely will not see in this political climate in any case.
There’s a multitude of problems HERE and will take a multitude of solutions.
i think i agree with you, so i hope you think you were agreeing with me.
but “just paying taxes” is a goo beginning, as in:
financial transaction tax to reduce or at least make the government some money from financial speculation.
a patriotic deficit surtax on incomes over 100k until the “deficit emergency” is over (that is when they stop shouting about it.)
the workers pay their own social security “tax”
and the middle folks accept a small tax increase.. one or two percent… as a sign of good faith.
Coberly: A totally deficit government FEEDS the bankers&banks. It is a GOAL that has been sought since Jekell Island and has been pursued ever since. They will not let go lightly, now or ever. As EMichael sez, “Its a feature not a bug.”
That “deficit emergency” will end at about the same time Hell freezes over.
It’ll be more of the same with little or no “good beginnings”.
Its election time in the land of the continuous campaign. Raising TAXES is political poison to even talk about it.
I quite agree with you about the end of the “deficit emergency” that was my point: either pay a higher tax or stop shouting about the “deficit emergency.”
Mike’s point: “Also is that which is collected in fair and honest use?” The answer is No. So why do we not work to fix this point rather than supporting more of “it” by only talking about raising taxes????