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 the The 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.