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Old 04-04-2013, 02:52 PM   #1
evolved
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A breakdown of U.S. Government debt.....

As some of you may or may not know, I work for a bank in wealth management. As part of this I read a majority of our "situation papers" that come out from our asset management/economics group. The topics vary all over the place.....last week commodities were discussed, the week before that the derivatives market in Europe, and this week talked about US Government debt. I'm not going to copy/paste but I'll paraphrase the pertinent parts.

I thought it was a good breakdown because among all of our conversations in here, sometimes the details get lost in the heat of the discussion.

Quote:
Originally Posted by Checking the facts on U.S. Government Debt
Where does the United States stand? The issue of debt has been in the news headlines and is a regular talking point for politicians in Washington. So, just how serious is the debt problem for our own federal government? Is it creating a potential risk for our economy?

The headline number typically touted in the media is the nations "gross debt" which is approximately $16.5 trillion. Using that number, the debt-to-GDP ratio for the United States is approximately 104%. That is a higher level than Spain's debt in relation to its economy, and in the range that is considered a risk to future economic growth. That perspective understandably leads to a concern that the United States faces a significant economic risk due to its lofty government debt.

Along with the amount of outstanding debt, the conventional wisdom is that China is the largest holder of U.S. government debt. China currently holds approximately $1.2 trillion in U.S. debt -- which is less than 10% of our total debt. The perception is that this creates an additional risk for the country's financial stability should China decide to cut back its financial commitment to U.S. debt securities.

While the debt issue is a serious one, it is a topic where a great deal of misinformation has been circulating. To clarify, here are some facts that should help provide perspective:
  • Of the $16.5 trillion in gross U.S. government debt, the largest holder is not China, but ourselves. The Social Security trust fund has more than $5 trillion invested in U.S. government securities. It is fair to categorize this $5 trilion of the nation's debt as intragovernmental holdings, and therefore a relatively reliable source of ongoing investment in our nation's debt. By law, Social Security funds can only be invested in the safest securities. Debt issued by the U.S. government continues to be viewed as the safest investment in the capital markets.
  • If we assume that the total debt "held by the public" amounts to $11.5 trillion, that results in a debt-to-GDP ratio of about 73%, much more manageable than the 104% top-line number associated with "gross debt."
  • The largest holder of our public debt is again not China, but the Fed. The Fed holds approximately $1.7 trillion of U.S. government debt securities, which is 42% more than the amount held by China. This again can, for all practical purposes, be categorized as intergovernmental holdings.
  • That brings the total value of publicly held debt to $9.8 trillion, or equal to a debt-to-GDP ratio of 60%, approaching the ratio in Germany, which is widely considered to be the most financially stable government in Europe.

The challenge continues, however. These numbers should help provide perspective and temper the concern that the United States faces an imminent debt crisis, but it does not mean that the issue of dealing with the debt should be taken lightly. Sizeable annual federal budget deficits mean that our net debt has been growing at an alarming rate since the financial crisis. This is an important problem that needs to be addressed. Such high deficits cannot be sustained indefinitely without causing economic harm.

It is important that policymakers in Washington begin to better manage the nation's budgets to bring them more into balance. This is the only way to assure that future debt levels do not reach a danger point that could lead to structural economic issues. The risk today is manageable, but we can't assume that the problem will go away.
Thoughts? Comments? tl;dr???
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Last edited by evolved; 04-04-2013 at 03:27 PM.
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Old 04-04-2013, 03:05 PM   #2
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I equate the Government's debt problem to a smoking problem. Everything is fine until something major happens. The question becomes does our Government proactively take measures to curb their smoking problem, do they learn vicariously through the blunders of other nations or do they wait until they receive the bad news that they have cancer?

After all, what's one more cigarette when all superficial signs point to a healthy body?
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Old 04-04-2013, 03:25 PM   #3
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It's intragovernmental holdings. Not intergovernmental holdings. The Social Security Trust is definitely an example of intragovernmental holdings. The Fed's balance sheet is technically in the control of a nominally independent entity, but I guess you could also characterize it as intragovernmental although the US Treasury does not recognize it as such.

Quote:
I equate the Government's debt problem to a smoking problem. Everything is fine until something major happens. The question becomes does our Government proactively take measures to curb their smoking problem, do they learn vicariously through the blunders of other nations or do they wait until they receive the bad news that they have cancer?

After all, what's one more cigarette when all superficial signs point to a healthy body?
This is pretty much spot on. The real problem is that the US government was actually a relatively debt free institution (if you characterize the SST and the Federal Reserve as assets of the US government) before the financial crisis and now it's actually fairly debt ridden. If interest payments go up and we keep our debt levels stable, it'll be uncomfortable but not crippling. But if we keep running deficits larger than the country's economic growth, we're going to have a huge problem on our hands in about 10-15 years. When the next recession comes, the Federal Reserve will not be able to expand its balance sheet like it has currently done (without ruinous inflation) and the Federal government will not be able to borrow at low rates.

To change metaphors, we've already used up most of our bullets. When the next wave of zombies come, we're going to have to fight in the trenches with shovels and bats, and that's a lot more dangerous.

Edit:

Oh, one more thing I don't like about the writing. The way the author constantly shifts numbers. It's misleading to say "China holds less than 10% of our total debt" when the author is trying to make the case that the only debt we should be worried about is non-intragovernmental holdings. Because if that's the case, China would then hold 12%.

http://www.treasury.gov/resource-cen...uments/mfh.txt

And that's just the mainland. If China decides to ramp up capital controls in Hong Kong, suddenly "Chinese" holdings of Treasurys jumps up to 1.4 trillion. And if you want to include Taiwan, then it's 1.6. All told, national Chinese institutions and persons hold about 16% of the US' net public debt (gross debt less intragovernmental and Fed holdings), which is pretty significant. It's certainly enough to roil the bond markets if they decide it isn't safe to hold Treasurys anymore.
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Last edited by rapier7; 04-04-2013 at 03:31 PM.
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Old 04-04-2013, 03:28 PM   #4
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Quote:
Originally Posted by casino is no lie View Post
I equate the Government's debt problem to a smoking problem. Everything is fine until something major happens. The question becomes does our Government proactively take measures to curb their smoking problem, do they learn vicariously through the blunders of other nations or do they wait until they receive the bad news that they have cancer?

After all, what's one more cigarette when all superficial signs point to a healthy body?
Totally agree. Our government, for as long as I can remember, has never been one to plan well for the future, but react to events as they, or after they, occur.

Quote:
Originally Posted by rapier7 View Post
It's intragovernmental holdings. Not intergovernmental holdings. The Social Security Trust is definitely an example of intragovernmental holdings. The Fed's balance sheet is technically in the control of a nominally independent entity, but I guess you could also characterize it as intragovernmental although the US Treasury does not recognize it as such.
Good catch. I was typing quickly and my fingers went one way while I was thinking another way.
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Old 04-04-2013, 03:37 PM   #5
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Quote:
Originally Posted by evolved View Post
Totally agree. Our government, for as long as I can remember, has never been one to plan well for the future, but react to events as they, or after they, occur.
That is because there is a difference between politics and government.

However, the politicians would not act as such if the people didn't. Only when the people are willing to feel the pain of deficit reduction and elect folks to take that action that includes their state or congressional district will this turn around.

So many chant "Cut the pork!!" But, they leave out "for everybody else, but, not us."
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Old 04-04-2013, 04:02 PM   #6
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While debt might be a topic for serious concern, I think that concern has been grossly inflated and manipulated in service to alterior conservative political ends such as reducing taxes, reducing/hamstringing government, etc. This has also led to the aggressive proffering of austerity based economic measures that have worked so disasterously in Europe rather than a more of a prosperity-based strategy and address our debt issues primarily through growth rather than hacking away at things.
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Old 04-04-2013, 09:41 PM   #7
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Quote:
Originally Posted by casino is no lie View Post
I equate the Government's debt problem to a smoking problem. Everything is fine until something major happens. The question becomes does our Government proactively take measures to curb their smoking problem, do they learn vicariously through the blunders of other nations or do they wait until they receive the bad news that they have cancer?

After all, what's one more cigarette when all superficial signs point to a healthy body?
Me gusto

The notion tends to be reactive instead of proactive.
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Old 04-04-2013, 10:41 PM   #8
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I think the article discounts international creditors', such as China or Japan's, influential power should they pull out of the US bond market.

From a number's standpoint, 10% is small indeed but noticeable enough that if China sells off its holdings for whatever reason what's to say others won't follow suit out of panic?

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