Daily Management Review

Who owns the US debt?


The debt of the United States is about $ 20 trillion. And when it comes to who owns American debt, everyone recalls China, Japan and other big countries-holders of Treasuries.

Kurtis Garbutt via flickr
Kurtis Garbutt via flickr
However, many do not know that the Social Security Trust, known as pension money of Americans, owns most of the public debt. How does it work and what does it mean?

The US Treasury manages the US debt through the State Debt Office. The debt is divided into two broad categories: intra-government reserves and public debt.

Intra-government reserves

This is part of the federal debt owned by 230 other federal agencies. There are $ 5.6 trillion, or almost 30% of the debt. Why does the government owe money to itself? Some agencies, such as the Social Security Trust, receive more income from taxes than they need.

Instead of storing this money under a giant mattress, agencies buy treasury treasure along with it. Having treasurers, they transfer their surplus funds to a common fund, where they are spent. Of course, one day they will buy their treasuries for cash. The federal government will have to either raise taxes or create more debts to give the agencies the money they need.

Which agencies own most of the Treasury? Social Security Services. Below is a detailed breakdown as of December 31, 2016.

• Social security (the Social Security Trust Fund and the Federal Accident Insurance Fund) - $ 2.801 trillion.

• Management of pension funds - $ 888 billion.

• The pension fund for military personnel - $ 670 billion.

• Medicare (Federal Trust Fund for Hospital Insurance, Federal Supplementary Medical Insurance Fund) - $ 294 billion.

• All other pension funds - $ 304 billion.

• Cash to finance the activities of the federal government - $ 580 billion.

Public Debt

The state owns the rest of the state debt ($ 14.7 trillion). Foreign governments and investors own almost half. One quarter belongs to other government structures.

These include the Federal Reserve, as well as state and local authorities. 15% belongs to mutual funds, private pension funds and holders of savings bonds and treasuries. The remaining 10% are owned by enterprises, such as banks and insurance companies. It also belongs to a multitude of trusts, companies and investors.

Here is the list of holders of public debt as of December 2016:

• foreign holders - $ 6,004 trillion,

• The Fed - $ 2.465 trillion,

• mutual funds - $ 1.671 trillion,

• state and local authorities, including pension funds, $ 905 billion,

• private pension funds - $ 553 billion,

• banks - $ 663 billion,

• insurance companies - $ 347 billion,

• US savings bonds - $ 166 billion,

• Others (private individuals, government-sponsored enterprises, brokers and dealers, bank trusts, corporate and unincorporated enterprises and other investors) - $ 1.662 trillion.

This debt refers not only to treasury bills and bonds, but also to treasury securities with protection against inflation and special securities of state and local authorities.

As you can see, if you compensate for social security debts and all pension funds, almost half of the US Treasury debt remains in trust for the citizens’ retirement. If the US cannot repay the debt, it will anger foreign investors, but current and future retirees will suffer the most.

Why does the Fed own treasury bonds?

As the central bank of the country, the Fed is responsible for lending. It has no financial reason to own treasury bonds. So why did the regulator redouble its position between 2007 and 2014?

It was then that the Fed increased its operations on the open market, buying treasuries for $ 2 trillion. This QE stimulated the economy, supporting low interest rates. This helped the US avoid a recession.

Did the Fed monetize the debt?

Yes, this is one of the effects. The Fed bought treasures from its member banks, using credits created from the air. This had the same effect as a printing press. Keeping low interest rates, the Fed helped the government avoid the high interest penalty that usually follows excessive debt.

The Fed completed QE in October 2014. As a result, interest rates on the benchmark 10-year Treasury bonds rose from a 200-year low of 1.442% in June 2012 to about 2.17% by the end of 2014.

On September 29, 2017, the Federal Committee for Open Market Operations announced that the Fed would begin cutting its Treasury bonds in October. The interest rates are expected to increase in the end.

Foreign owners of the US national debt

In August 2017, China owned $ 1.2 trillion of US national debt. This is the largest foreign holder of securities of the US Treasury. The second-largest holder, Japan, owned $ 1.1 trillion of US national debt.

Both Japan and China want to keep the value of the dollar higher than the value of their currencies. This helps maintain availability of its exports to the US, which helps their economy grow. That's why, despite China's occasional threats to sell its holdings, both countries are happy to remain America's largest foreign bankers.

China replaced Britain as the second largest foreign holder of the US national debt on May 31, 2007. It was then that it increased its reserves to $ 699 billion, ahead of Britain with its $ 640 billion.

Ireland ranks third, owning $ 307 billion. Brazil is the fourth largest debt holder in the amount of $ 274 billion.

The Cayman Islands are in fifth place: $ 260 billion. The Bureau of International Settlements considers this a front for sovereign funds and hedge funds, whose owners do not want to open their positions. It also concerns Luxembourg ($ 213 billion) and Belgium ($ 97 billion).

The next largest holders are Switzerland, Great Britain, Hong Kong, Taiwan, Saudi Arabia and India. Each of them owns $ 135 billion to $ 248 billion.

source: bloomberg.com