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.