Who Is The USA In Debt To? (Part I & II)

[논둑길맨발로]

Who Is The USA In Debt To? (Part I & II)

Post Categories: Canada

Valentin KATASONOV | Saturday, November 2, 2013, 12:30 Beijing

120 views

Comments(1) 

Share on facebookShare on twitterShare on emailShare on printShare on gmailShare on stumbleuponShare on favoritesMore Sharing Services13Print

 PART I

It is not just the types of debt that arise and accrue in the American economy, but also a core group of well-known debtors. This includes the federal government, state and local governments, the financial and non-financial sectors of the economy, and the household sector. And this raises an interesting question: who is this core group of debtors in debt to?

Government debt: «market» and «non-market» components

Despite the fact that US economic and financial statistics are believed to be some of the most complete and most detailed, they conceal a number of secrets concerning American debt holders… One has to be guided predominantly by expert analysis. The required statistics on debt holders are only available for one category of debt – the debt of the US federal government.

Sources of information are the US Federal Reserve’s quarterly statistical review, called the Flow of Funds Accounts, and the Treasury’s monthly statistical bulletin, Treasury Bulletin.

To begin with, the US government’s debt can be divided into two categories:

1. Debts held by those who have purchased US Treasury debt securities on the financial market. First and foremost, these are Treasury securities and Treasury bills and are referred to as «market debts».

2. Debts held by various extrabudgetary social funds and government-funded organisations (US government accounts). This is sort of like the government borrowing from itself. It simply moves money from one stash called «funds» to another stash called «the federal budget».

Or it increases its outstanding obligations to government-funded organisations. These debts are characterised by a particular method of execution and accounting; unlike Treasury securities, they are not traded on the market. It is also debts arising from loans within the state sector, so-called «non-marketable debts».

It should be noted that the US Treasury’s largest non-market lender is theThe Old-Age and Survivors Insurance Trust Fund. In fact, it could be regarded as a subdivision of the Treasury with a standalone balance sheet. The bundle of securities on the fund’s balance sheet totals nearly USD 2.5 trillion.

Government debts issued by means of Treasury securities have grown quickly in recent years, both in absolute and relative terms. Their amounts are (in trillions of dollars, at year-end): 2008 – 6.14; 2009 – 7.59; 2010 – 9.17; 2011 – 10.24; and 2012 – 11.39. As of the middle of 2013, they made up USD 11.71 trillion. In other words, over the period from 2008 to now, debt issued by means of Treasury securities has almost doubled.

In 2008, debt issued by means of Treasury securities made up 65.2 percent of the total government debt. By the middle of 2013, however, the share of Treasury securities in the government’s debt had risen to 75 percent. Figures are sometimes muddled up in the media and even in financial literature due do the fact that in some publications, government debt is understood to mean both categories of US federal government obligations, whilst in others it is only the obligations issued in the form of Treasury securities.

The main categories of holders of US Treasury securities

Let us now look at the structure of government debt issued in the form of Treasury securities based on the main types of debt holders. Debt holders like these can be divided into foreign (non-resident) and American (resident). American debt holders, in turn, can be further subdivided into debt holders in the financial sector of the economy and debt holders in the non-financial sector. In the financial sector, the US Federal Reserve System (Federal Reserve Banks) is distinguished separately from all other organisations.

The share of foreign holders of Treasury securities (percent, at year-end): 2008 – 52.9; 2009 – 48.4; 2010 – 48.6; 2011 – 48.8; 2012 – 48.9; and 2013 (mid-year) – 47.9.

The share of the US financial sector among holders of Treasury securities (percent, at year-end): 2008 – 36.0; 2009 – 33.9; 2010 – 32.6; 2011 – 38.7; 2012 – 37.3; and 2013 (mid-year) – 38.2.

The share of other US holders (non-financial sector) (percent, at year-end): 2008 – 11.1; 2009 – 17.7; 2010 – 18.8; 2011 – 12.5; 2012 – 13.8; and 2013 (mid-year) – 13.9.

The share of the FRS among holders of Treasury securities (percent, at year-end): 2008 – 7.8; 2009 – 10.3; 2010 – 11.1; 2011 – 16.2; 2012 – 14.7; and 2013 (mid-year) – 16.6.

The share of US financial organisations excluding the FRS (percent, at year-end): 2008 – 28.2; 2009 – 23.6; 2010 – 21.5; 2011 – 22.5; 2012 – 22.6; and 2013 (mid-year) – 21.6. Other financial organisations include various investment funds (first and foremost mutual funds), non-governmental pension and social funds, borrowing and lending organisations (banks), insurance companies and so on.

Domestic holders of US Treasury securities

Both popular literature and journalism usually provide several simplified diagrams of US government borrowing. They mention that the US Federal Reserve System is said to be the main holder of Treasury securities. The twelve Federal Reserve Banks (of which the Federal Reserve Bank of New York is the biggest) are allegedly buying up all issues of these securities «at the source». We can see that back at the start of the financial crisis, this share was rather modest.

At the end of 2008, Treasury securities to the tune of USD 484.5 billion, or nearly 8 percent of the total volume of these securities, were to be found on the FRS’ balance sheet. By the middle of 2013, FRS securities already totalled USD 2,159.5 billion, or 16.6 percent. For reference, it should be noted that there have been moments in US history when the FRS’ share in the ownership of Treasury securities has exceeded the current level.

In the middle of the 1970s, for example, the FRS’ share reached 23 percent (equivalent to USD 75 billion in absolute terms). Experts believe that if current trends continue, the FRS’ share in the ownership of Treasury securities could rise to 20 percent by the end of 2014.

In no small way, the growth of the FRS’ share has been helped along by so-called «quantitative easing» programmes. However, one ought to remember that these programmes were not primarily aimed at the purchase of Treasury securities, which are classified as high-quality financial instruments, but at the purchase of «junk» bonds on the US financial market.

To put it another way, the role of the FRS in securing government borrowing does not only and does not so much boil down to the direct purchase of Treasury securities, as the creation of conditions for such purchases by other segments of the US economy. The FRS ensures that «junk» bonds on the balance sheets of banks and other financial and non-financial organisations are replaced with Treasury bonds.

The FRS carries out a dual-purpose rescue operation: firstly, banks and other private organisations that have not yet managed to pull themselves together following the financial crisis are saved and, secondly, it rescues the government. We do not know whether this rescue operation happens spontaneously or whether it is strictly regulated by the Federal Reserve. But I think there is every likelihood that it involves a strictly controlled process.

To begin with, the purchase of «junk» bonds is carried out in exchange for a commitment by the bank to acquire Treasury securities with the proceeds. Incidentally, other active operations by the FRS may also have a «binding» nature.

For example, the Federal Reserve Bank extends credit to a private American bank in exchange for a commitment by the latter to purchase a certain number of Treasury securities. Without such an explanation, it is difficult to believe that banks, investment funds, insurance companies and other financial and non-financial US organisations are voluntarily purchasing securities – albeit reliable, but with a symbolic interest rate.

All the more so if one takes into account the depreciation of the dollar – the rate is virtually negative. It is a case of all financial and non-financial companies having to pay the government a further tax by way of the «voluntary-compulsory» purchase of Treasury securities on top of the taxes they already pay.

Experts admit that the FRS, either directly or indirectly, is backing the purchase of 35-40 percent of all US Treasury securities, and within the US (without foreign purchasers) – 70-80 percent.

Altogether, by the end of the first quarter of 2013, USD 11,047.4 billion of the US government’s marketable and non-marketable debt was in the hands of every category of American debt holders, according to official data from the US Treasury. The amount of marketable debt (Treasury securities) in the hands of American debt holders at that time amounted to USD 6,362.6 billion.

These debt holders include (in billions of dollars): the FRS – 1,972.0; borrowing and lending organisations (banks) – 341.4; private pension funds – 457.7; the pension funds of states and local authorities – 229.0; mutual funds – 946.4; insurance companies – 263.3; state and local governments – 474.5; and other debt holders – 1,678.2.

The last of these groups is extremely mixed and includes companies and organisations in the non-financial sector of the economy (corporations, small- and medium-sized businesses), individuals, other types of funds (including banks’ personal trust funds), as well as brokers and dealers and other types of investors.

Let us look more closely at the modest role banks play among US holders of marketable debt: they hold just a little more than 5 percent of all Treasury securities within the US. Even back in the middle of 2008, when the flywheel of the financial crisis was in full spin in America, there were even fewer Treasury securities on the balance sheets of American banks – nearly USD 100 billion.

Today, this figure has increased more than threefold. Some experts consider such an increase to be kickbacks by banks for the enormous sums (nearly USD 2 trillion altogether) spent by the government to save the US banking system during the financial crisis.

PART II

Foreign holders of American debt

As has already been noted, in recent years the share of non-American holders of US Treasury securities has been wavering around the 50 percent mark. However, there has also been a visible trend to reduce the share of non-residents (from 52.9 percent at the end of 2008 to 47.9 percent in the middle of 2013).

The overwhelming majority of US Treasury securities held by non-residents are securities on the balance sheets of central banks and finance ministries in other countries. These are the so-called official holders of the US government’s marketable debt. The share of official holders among all foreign holders of US Treasury securities in 2008 amounted to 74.6 percent, while in the middle of 2013 it was 71.6 percent.

It is possible to conclude that private foreign investors are not investing in US Treasury securities particularly willingly, since these securities have an extremely low rate of return.

Table 1.

Main country holders of US Treasury securities (in billions of dollars, as of the end of July 2013).

Country	2013	2012	2011
1. China	1,277.3	1,160.0	1,307.0
2. Japan	1,135.4	1,119.8	881.0
3. Caribbean banking centres	287.7	247.6	196.3
4. Oil-exporting countries	257.7	268.4	242.6
5. Brazil	256.4	256.5	216.2
6. Taiwan	185.8	194.4	146.6
7. Switzerland	178.2	184.8	118.1
8. Belgium	167.7	141.3	88.8
9. Great Britain	156.9	135.4	135.7
10. Luxembourg	146.8	135.1	121.7
11. Russia	131.6	156.2	151.7
12. Hong Kong	120.0	137.1	112.4
13. Ireland	117.9	93.2	53.9
14. Singapore	81.5	96.4	64.4
15. Norway	74.6	68.2	26.5
16. Canada	65.5	61.3	44.7
17. Mexico	63.3	53.9	31.2
18. India	59.1	59.3	38.9
19. Germany	56.3	66.5	63.8
20. Turkey	55.0	30.3	41.9

Notes on the table:

“Oil-exporting countries” refers to the total amount of US debt on the balance sheets of the following countries: Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, UAE, Algeria, Gabon, Libya and Nigeria.

“Caribbean banking centres” refers to the following jurisdictions: the Bahamas, Bermuda, the Cayman Islands, the Netherlands Antilles, Panama and the British Virgin Islands.

It follows from the above table that:

1. China and Japan are the main holders of US Treasury securities outside of the US. Of the total amount of Treasury securities in the hands of foreign holders, equal to US 5,590.1 billion (as of the end of July 2013), these two countries accounted for USD 2,412.7 billion, or 43.2 percent. The year before, this figure was 42.4 percent.

2. While the total amount of Chinese investment in US Treasury securities did not change much for 2011-2013 (there were only temporary moderate fluctuations in both directions), the total amount of Japanese investment in these securities over the same period increased by almost 1.3 times.

3. The majority of countries listed in the table above increased their investment in US Treasury securities over the period 2011-2013. Countries like Norway, Ireland, Mexico, Switzerland, India and Belgium increased their holdings of US treasuries particularly dramatically. Thus Norway increased its holding of securities by 2.8 times, Ireland by 2.2 times, Mexico by 2 times, Belgium by 1.9 times and Switzerland by 1.5 times.

4. Only two countries from the whole list cited above reduced their investment in US Treasury securities over the period 2011-2013 – Germany and Russia (by 11.8 and 13.2 percent respectively). While Russia was in 6^th place among foreign holders of US Treasury securities in the middle of 2011, by the middle of 2012 the country was in 8^th place and by the middle of 2013 – 11^th place. In other words, Russia has been consistently reducing its financing of the US government.

On individual foreign holders of US Treasury securities

Enough has already been said about China as the US government’s largest foreign creditor. China’s enormous reserves in the form of US Treasury securities are, at one and the same time, both China’s strength and its weakness. Its strength because these securities are Beijing’s trump card in talks with Washington on all kinds of issues – trade, economic, political and military.

The threat of the dollar collapsing, along with the US fiscal system, by means of a sharp reduction in China’s reserves of US Treasury securities is a persuasive argument for Beijing in talks with its American partner. The weakness of China’s position, meanwhile, lies in the fact that if the dollar and the fiscal system do collapse for reasons independent of Beijing, then China will suffer enormous losses.

Its vast portfolio of US Treasury securities makes it possible for China to achieve tactical victories, but also threatens the country with a strategic defeat.

As far as Japan is concerned, meanwhile, it is following Washington’s instructions calling for the Japanese to build up its reserve of Treasury securities much more obediently.

Offshore zones in the Caribbean – the Bahamas, Bermuda, the Cayman Islands, the Netherlands Antilles, Panama and the British Virgin Islands – have become the third largest investor in US Treasury securities. Over a period of three years, they have increased their portfolio of these securities by almost 1.5 times.

After Barack Obama was elected to the White House, Washington declared the start of a crusade against tax havens which experts estimated were causing the American budget to miss out on up to USD 100 billion annually. However, the support that these Caribbean tax havens provide to the US Treasury is almost three times greater.

Evidently, the purchase of securities to the tune of almost USD 300 billion could be regarded as payoffs for tax havens to remain so close to America.

The positions of the group of oil-exporting countries as holders of US Treasury securities over the period 2011-2013 have not changed particularly.

Many countries in Western Europe are major holders of American Treasury securities. At the end of July 2013, Switzerland, Belgium, Great Britain, Luxembourg, Ireland, Norway and Germany as a whole owned securities to the tune of USD 898.4 billion. If we add to these France, Sweden, the Netherlands, Italy and Spain, which are not included in the table, then we get USD 1,058.8 billion.

Large-scale investments by European countries in American Treasury securities seem rather strange against the background of a severe debt crisis in the European Union. Many of these European countries are themselves up to their ears in debt, with the majority of the debt external, to non-residents.

At the beginning of 2012, the external debt of individual countries equalled (in trillions of dollars; the relative level as a percentage of GDP is given in brackets):

Great Britain – 9.84 (416); France – 5.63 (188); Germany – 5.62 (159); the Netherlands – 3.73 (470); Italy – 2.68 (101); Spain – 2.57 (165); Ireland – 2.36 (1308); Luxembourg – 2.15 (4605); Belgium – 1.40 (267); and Switzerland – 1.35 (271).

Switzerland, Belgium, Great Britain, Luxembourg and Ireland each have a bundle of securities amounting to more than USD 100 billion, and each of them has external debt that far exceeds their GDP. (Against this background, even Greece’s relative level of external debt looks rather modest at 167 percent of GDP.) So is this benevolence towards America? Absolutely not.

It is one of the main indicators of Europe’s dependence on the United States. And more than that, a number of European countries are not justtributaries of America, they are still acting as tax collectors for the US in other countries. Tiny Luxembourg, for example, purchased US Treasury securities totalling almost USD 150 billion, with a GDP of less than USD 47 billion.

Luxembourg is a typical tax collector. It borrows money from other countries on a colossal scale, while Luxembourg’s external debt exceeds its GDP by 46 times! For a long time, Great Britain was the biggest investor in US Treasury securities in Western Europe, but in recent years it has been overtaken by Switzerland and Belgium.

Among the largest holders of US Treasury securities are the BRICS countries (Brazil, Russia, India, China and South Africa). At the end of July 2013, the amount of such securities in their reserves totalled USD 1,738.2 billion.

This equalled 31 percent of all US Treasury securities which at that time were in the hands of non-residents. China was the largest holder, of course, with almost three quarters of all US Treasury securities in the BRICS group. From 2011-2013, every BRICS country with the exception of Russia built up their holdings of US Treasury securities.

There were times when Russia had a rather modest bundle of US Treasury securities in its international reserves. At the end of 2007, their amount did not exceed USD 32.7 billion. However, by the end of 2008 their volume had increased to USD 116 billion, or by more than 3.5 times, in other words.

Later, by the middle of 2012, holdings of American Treasury securities in the reserves of the Russian Federation grew slowly, slightly exceeding the level of USD 150 billion, but started to come down again over the last year (going down to the level of USD 131.6 billion, or by USD 24.6 billion).

An example worthy of emulation! A reduction in the holdings of Treasury securities over the last year has also been recorded in Taiwan, Switzerland, Germany, Hong Kong, Singapore, and the group of oil-exporting countries, but in all of these instances, the size of the reduction has been significantly less than in Russia… 

Conclusion

In October 2013, the US, experiencing an acute fiscal crisis, once again demonstrated that it is able to exist merely in the context of constant borrowing from abroad and a build up of its government debt to other countries. America’s colossal government debt is a threat to the stability of the global economy.

Unfortunately, Beijing, Tokyo and London have virtually become hostages to this model of financing the US government. In the first half of October, the leaders of China, Japan, India and a number of other countries called on the US President and US congressmen to come to a decision as soon as possible regarding an increase of the government’s debt ceiling – so in practice, they were asking Washington to let them continue paying a tribute to America through the purchase of Treasury securities.

Valentin KATASONOV | Strategic Culture Foundation

http://www.strategic-culture.org/news/2013/11/01/who-is-the-usa-in-debt-to-i.html