Tuesday, August 9, 2011

Who Owns the US Public Debt?

Another great post from Bill Mitchell:
Bill Mitchell, “When the Government Owes itself $US1.6 trillion,” Billy Blog, August 9.
As of March 2011, the composition of US public debt, as percentages of the total gross debt, is as follows:
Federal Reserve holdings 8.9%
Intergovernmental holdings 32.8%
Domestic private 26.9%
Private and Foreign holdings 58.3%
China 8%
Japan 6.4%
Other foreign 17%
First, it is notable that the US government itself holds nearly half of its own debt (41.7%). The Federal Reserve owns more than China does, and the Fed has massively increased its holdings in QE1 and QE2. The bonds held by the Fed are not a burden to the government, and should not be regarded as “debt” in the accepted sense, because these bonds have been bought back from the public by the Fed and are essentially “paid back.” The Fed has the power to create money from nothing and uses this money to purchase bonds, which are then effectively retired. No taxpayer money is normally used in these standard open market operations. Although the Treasury does pay interest to the Fed on the bonds it holds on the asset side of its balance sheet, this money simply goes right back to the Treasury, as the government and central bank are essentially one entity. Thus the interest payments are not a burden to the US government, nor are the bonds held as assets by the central bank. In fact, central bank purchases of bonds reduce the stock of government debt owed to the public, and hence the burden of such debt. In fact, Alan Greenspan, Chairman of the Federal Reserve from 1987-2006, recently told us what we all know:
“The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.”

(Greenspan’s remark which is a statement of plain fact is naturally seized upon by Austrians and other free market apologists, with their usual and ridiculous screams about hyperinflation).

Secondly, China itself owned some 8% of the total, as of March 2011. Not really that much. What is the significance of this? Bill Mitchell explains:
“The accumulation of these US-dollar denominated assets is the ‘reward’ that the Chinese (or other foreigners) get for shipping real goods and services to the US (principally) in exchange for less real goods and services from the US. Given real living standards are based on access to real goods and services, you can work out who is on top (from a macroeconomic perspective).
This is consistent with the MMT view that imports are a benefit and exports a real cost – a view also held by Milton Friedman, curiously.


  1. LK,

    So are you saying that the government should repay itself from money they create? If so, why go through all that trouble instead of just cancelling the whole repayment since it is money it owes itself?

  2. "So are you saying that the government should repay itself from money they create? "

    It already does: the interest on Fed-held bonds DOES go back to the Treasury, so your question is confused.

  3. LK,

    But why advocate or encourage such policy? seems like an unnecessary process. Why doesn't the government just cancel its repayment to itself?

  4. I would prefer to see a government with a treasury/central bank run on Post Keynesian/MMT lines.

    You would still issue bonds to control interest rates and to provide safe financial assets to the financial sector and people who do not wish to gamble their money in stocks and shares.

    The size of the stock of government debt would be limited by Abba Lerner's functional finance model.

    When expansionary policies are necessary you run a deficit; when contraction is needed you run a surplus.

    The amount of debt issued by the private sector is decided the central and treasury.

    Bill Mitchell describes how the system would work in the FAQs:


  5. Correction:

    "The amount of debt issued TO the private sector "

  6. Izzy - you are right, there is no real reason for having a central bank outside the Treasury, and that is how the US did it for most of its history. The Fed & the 1st & 2nd Banks of the US are the exception.

    Running it this way has been found to be the best way to perform confusing but usually meaningless financial manipulations. Shell games to persuade people that up is down, being in debt is wealth and holding debt is poverty, and to distract them from the real frauds going on - the lack of regulation of and even welfare for Wall Street criminals.

  7. The whole thing is nothing but a fraudulent scheme to claim the national debt is being paid down when in fact it isn't.

    It's about the same as if I had borrowed and owed $100,000.00, and wanted/needed to get more money ($1,000.00) to buy something else I wanted. To get that extra money, I borrow $1000.00 from you in liew of a note saying I'll pay you back the money plus a little interest, at some point in time. Then, later, I need to pay you back, but don't have the money to do it because I now owe $1100,000.00, so I take out a piece of paper, create a fake $1000.00 bill and give it to you as payment to buy my note back from you.

    Same thing happens in the case of the government printing money it doesn't have assets/securities to back it with. The government gets the notes back, but because they paid to get the notes back with money they didn't have securities to cover, they still are in debt by that same figure. At some point in time, the government is going to have to pay to get the excessive money they printed out of the market, or the values of the money will just keep plummeting. As it is now, our Dollar has lost almost 40% of the buying power it used to have because of these schemel.