As this blog takes a close look at the issue of federal debt and the flow of capital through the US economy, it seemed appropriate to examine the financing of the gross financial debt of the United States by looking for who finances this debt in the USA and abroad.
We leave aside to deal with this problem the surpluses of the social funds (funds and trust funds) of which we have followed the regular contribution to the financing of the debt of the US and explained the fundamental role.
In short, these funds – which have long fed the treasury funds by providing surpluses in lieu of quasi-national savings – are no longer able to generate sufficient surpluses to meet the colossal needs of the Treasury
As a result, the federal debt has become and will become more and more a market debt financed by the US and foreign actors, the portion of the federal debt financed by surpluses of social funds constituting an intra-governmental debt. The logical point is that in a country where national savings have steadily declined in volume and as a percentage of GDP, the financing of an unprecedented increase in public debt requires the use of external capital. The Bush Jr administration did not miss it.
A fact of news still motivated this post: the securities of the treasure with maturity higher than one year (Notes of 1 to 10 years, leaps to 15-20-30 years) were sold more than bought by their foreign holders: the net purchases of these treasury bills were – 22,550 billion dollars in May 2009. The fact is not exceptional, the net purchases of bonds and notes had already recorded in December 2008 a -25,815 billion dollars. A lark not making the spring, it is difficult to say if this decline announces difficulties of external financing of the federal debt. In any case, it is important to look at the figures more closely.
For now, long-term and short-term Treasury debt issues are readily available to the US and foreign buyers at interest rates, which is indeed growing: the demand for Treasury (Offering Amt) funds have been in July 2009 extensively covered by the offers of subscribers (Total offered) at auctions of treasury bills.
The rise of the external debt.
The information available is not legion, we chose to make a commented infographic as simple as possible.
In March 2009, the debt held by the public was $ 6 341 billion, $ 3267 billion was held by foreigners against $ 3074 billion by the United States.
Contrary to a tenacious idea, the share of market debt held by foreigners has not increased exponentially with the increase in the gross federal debt. Before the onset of the crisis, the share of market debt held by foreigners was 52.8% in June 2007, down from 51.5% in March 2009.
Taking the total federal debt as the basis of calculation, the finding is different: the share of foreign capital went from 24.7% of the total debt financing in June 2007 to 29.3% (Treasury: Estimated Ownership and US Treasury securities OFS-2 table).
The progression is sensitive but not very significant. What matters are the market debt shares that foreign funds represent? It is clear that the US has not so far significantly increased their external financial dependence on the crisis. This dependence, however, remains very important; $ 1 out of every two dollars of federal debt financing is no longer provided by the US, which is paying a heavy price for its savings.
It was especially before the crisis that the US became dependent from abroad for the coverage of the federal market debt. The share of foreign-held Treasury securities continues, in fact, ow in total market debt until 2007 after decelerating in the late Clinton years. For a short period, budget revenues were in fact higher than expenditures, which made it possible for the federal government to reduce its debt to foreign debt simply by reducing the debt with debt consolidation.
The increase in foreign federal debt financing coincides with the years of Bush’s presidency: after 2002, the surge in the external federal debt is evident. Thus, on the eve of the crisis, the United States reached an external federal debt representing about 50% of its market debt, and during the crisis managed to avoid falling more heavily under the control of foreign investors. It is in itself remarkable.
This first graph must be accompanied by two remarks.
1 ° The foreign debt is massively held by the states of foreign countries and, to a lesser extent, private investors. The share of private investors has decreased in comparison with that of official investors, the purchase of treasury bills is therefore primarily a political act in most foreign countries, we will come back to it.
2 ° Securities held by foreigners are composed at 4/5 by debt securities whose maturity is greater than one year.