The United States has a lot of debt, a whole lot of debt. Who is holding all that debt? A new analysis reports some surprising answers. The Federal Government itself holds a little over $12 trillion, through the Federal Reserve and Social Security and other agencies. The Federal Reserve should be banned from buying US debt. It is an interference in the market giving the right signals to policymakers about the size of the deficit. The Fed should unload its holdings and let the market completely set the rates on US debt. And I wonder if Social Security and its trust funds can’t find a better set of investments than US debt, although the high recent interest rates probably help returns.
Foreign purchasers hold about $9.3 trillion. Some are foreign country buyers, accounting for $5.5 trillion, which occurs for currency management, trade and other purposes. The rest is held by foreign companies and individuals. Interest rates on US debt are attractive right now. Around $2 trillion is owned by banks; US debt is still considered a safe investment for them. State and local governments hold about $1.6 trillion, likely again for investment of funds awaiting spending. Pension funds own about $1.2 trillion. These institutions have to invest over a long period so long-term US debt is a common investment for them. Insurance companies hold around $600 billion for the same reason. Other US investors, including indivduals, have $6.8 trillion.
Among foreign owners, ten years ago China was the largest holder but it has cut its holdings to a fourth of what they were, so it is now the third largest owner of US debt. Japan was the second largest owner by a slight margin, but has also cut its holdings dramatically. The UK has increased its proportionate ownership in recent years to become the second largest holder. The Caymans and Canada have also increased their holdings. There is a lot of focus on foreign buying of debt but we should be more concerned about domestic buyers getting more nervous about adding to their holdings. (FT Article)
