With the latest debt crisis averted, I thought it would be a good time to tackle an issue that a lot of Americans are not very knowledgeable about, the United States debt. Now I know what you’re thinking, “Blue, have you not been reading social media? Everyone is aware of the debt!” That’s not exactly what I mean. Everyone is well aware of the now $17 trillion debt the U.S. has accumulated. What they are not aware of is who holds that debt. Apparently some of the members of Congress did not understand this either or there never would have been the huge debate. So let’s get started.
I asked several people about who holds most of the $17 trillion debt and virtually every single person told me China. That would explain all the people saying that China is going to take over America right? Well that would be a reasonable argument, but China is not the largest holder of U.S. debt. So who is? The United States is. Of the $17 trillion of debt, about $5 trillion of it is directly held by the United States itself. So how can that be? There are several factors you must understand first.
First off, the United States Treasury Department creates treasuries (bills, notes, bonds, TIPS; the differences are not important for this) and sells them on the public market. This generates revenue for the United States government. These treasuries are probably the safest investment that anyone can make because they are guaranteed by the United States government. This is why you see so many foreign investors interested in purchasing them (i.e., China). Of course anyone can buy these, including you and me. So a lot of people in the United States will buy treasuries because of the high interest it yields. But so do government agencies. So now you can start to see how the United States owes itself money, right?
So there are a few hundred federal agencies in the United States government that have purchased treasuries. These agencies typically have excess revenue and use it to purchase treasuries that they will allow to sit and gain interest. They then cash them out later when the money is needed. The largest government investor is Social Security with about $2.6 trillion, for obvious reasons. Social Security has been taking in excess money for many years and has been using it to purchase treasuries. This is slightly smart considering everyone believes that Social Security is going to become insolvent with all the baby boomers retiring soon. So they have been investing in treasuries, hoping to generate enough interest to help cover the future payouts until the program can be restructured.
The second largest holder of debt is one that has come under a lot of scrutiny lately. The Federal Reserve holds about $2.1 trillion in treasuries. So why does the country’s central bank, which is independent of the federal government and responsible for the country’s credit, purchase treasuries? In essence so they can keep inflation low. The Federal Reserve prints extra money each month and puts it in circulation. Normally, this would cause inflation. Economics 101, when you print excess money, the value goes down, right? That is why they are purchasing the treasuries. They are printing the money to purchase treasuries. This is a very dumbed down definition for the process known as Quantitative Easing. So the Federal Reserve is printing excess money to purchase treasuries, to artificially keep inflation low; therefore keeping interest rates low; therefore making sure the economy does stagnant further. But think about what they are actually doing. They are taking United States debt (treasuries) and printing money to pay for it. This is what the term debt monetization means. They are turning the debt into money. This is what Republicans want to eliminate. They don’t feel that the Federal Reserve should be able to take extraordinary actions such as QE or debt monetization to artificially keep interest rates and inflation low because it is, in essence, tricking the markets.
To give a little more detail on the Federal Reserve’s role, it is important to note that if they were not purchasing the treasuries, even if they did not print money to purchase them, interest would inevitably rise. This would cause stagnation in the economy and would directly be reflected in the markets. For now, with the Federal Reserve purchasing treasuries, and keeping the interest rates low, the markets are extremely happy. That is why you see record setting numbers on the NASDAQ, S&P, and the Dow. They are partially responding to the Feds buying of treasuries. At the same time, this is extremely good for banks and billionaire investors, and bad for lower and middle class. It is helping to create the growing gap between the two, feeding the income inequality even more. It is virtually a two-edged sword.
There are 228 other federal agencies that own part a small piece of the United States $17 trillion debt. There are also thousands of individual Americans who own parts of the debt as well. So that makes up about $5 trillion of the debt. The rest, about $12 trillion is owned by foreign investments.
NOW we can get to China. China is the largest holder of U.S. foreign debt at about $1.3 trillion. This is about half of what the Social Security program holds, and nearly half of what the Federal Reserve holds. So why does China want to invest in U.S. debt? They want to keep the value of the dollar from falling. They want to make sure that there is no depreciation in the dollar or stagnation in the U.S. economy. Why? Because this helps to keep their currency low, creating a more willing U.S. market for Chinese goods. High exportation of Chinese goods to the U.S. keeps China’s economy booming. So no, China is not going to be cashing in treasuries, and is not interesting in the United States defaulting.
There are a large number of other countries and foreign investors that hold part of the U.S. debt. After China, Japan would be the largest holder, with about $1.1 trillion. Just for comparison, again keep in mind the $2.6 trillion held by Social Security, and it is more than the $2.4 trillion by the top two foreign countries–China and Japan—combined. After Japan there is a very significant drop off, to Luxembourg and Belgium with about $260 billion combined. Brazil, Taiwan, Switzerland, Russia, Hong Kong, and the United Kingdom each hold just under $200 billion each to round out the top ten.
So now you see that the United States debt is in essence a globally owned debt. Therefore, if the United States did not raise the debt ceiling (which does NOT allow us to spend more, only guarantees repayment) then it would cause a global panic. Treasury holders would be worried they would not receive payment and start selling them off. This would cause a huge expense for the United States, a huge rise in interest rates, and a tanking of the stock market. The jump in interest rates would cause the value of all treasuries to decline, meaning every single person that has paid into Social Security would be losing money.
All of this is why no sane person would want to let the U.S. default and not raise the debt ceiling. It is why not one time in this country’s history have we failed to raise the debt ceiling, and up until this presidency, it has never been on the brink of defaulting. Even Ronald Reagan knew that refusing to raise it would be disastrous and had to raise it eighteen times. Too bad today’s Republicans can’t be more like the man that they all claim to be descendants of.