Who Owns Our National Debt?

Former Sen. Alan Simpson has arguably done more to address our fiscal problems than anyone else in the last three years. He was co-chairman of the president's deficit-reduction committee, commonly known as the Simpson-Bowles budget plan. He's a good man on a good mission.

But he doesn't always get it right. Here's Simpson last week on The Daily Show with Jon Stewart talking about the fiscal cliff:

There's a group out there that doesn't give a damn about Republicans or Democrats or the president, and it's the people we owe $16 trillion to. Half of that is owned by private people -- people in New York or Cody, Wyoming. The other half is owned by feds, and half of that is owned by China.

Time out. I like you, Alan, but let's get the facts right.

China doesn't own a quarter of our debt. It doesn't even own 10%. When the latest data comes out, it probably won't even be the largest foreign creditor. (That title will go to Japan.) China has actually been a net seller of Treasuries for almost two years.

Let's start at the top. Who owns our $16 trillion national debt? Here's the tally as of June 2012 (the most recent month for which data is available): 

And here's the breakdown of the 10 largest foreign holders as of September:

Yes, China is the largest foreign holder -- though its share is nowhere near one-quarter of the total. But Japan owns an almost identical amount of Treasuries, and its share is growing like a weed. Why all the fuss about China when no one seems bothered by Japan? And China, as mentioned, has been a net seller of Treasuries since 2011. In May 2011, China held $1.31 trillion in Treasuries -- $200 billion more than it owns today. This shouldn't be surprising, as the country is trying to let its currency slowly appreciate against the dollar. Many have asked in panicked tones what will happen to interest rates when China stops buying our debt. The answer: It already has. And not only has the world gone on, but interest rates are at all-time lows.

Some will counter that the only reason interest rates are low is that the Federal Reserve is buying all the new debt -- right? Sort of, but there are misconceptions here, too. The Fed has purchased a lot of Treasuries over the last few years, but that was after it slashed its holdings in late 2008 to make room on its balance sheet for emergency programs to stabilize the financial system. Since 2002, the Fed's holdings of Treasuries have increased by $1 trillion, or 10.8% of the new debt issued during that time. The blog Macro Market Musings has shown that the Fed's ownership share of Treasuries has actually declined in the last decade. (Where the Fed has grown its ownership share considerably is the market for mortgage-backed securities.)

So who has purchased the $9.3 trillion in new debt issued over the last decade? Pulling from several different sources, here's what I came up with: 

None of this should be taken as an attempt to belittle those nervous about the debt. It's a serious issue no one should take lightly. The fact that we rely on foreign investors to finance 44% of our annual deficit is, to put it lightly, not ideal. The kindness of strangers doesn't last forever.

But what's more dangerous than a massive mountain of national debt? Exaggerations and misconceptions about that debt.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

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  • Report this Comment On December 11, 2012, at 5:36 PM, glassbd86 wrote:

    "The kindness of strangers doesn't last forever" -- I highly doubt that anyone is buying US debt out of "kindness", whether they be foreign or otherwise. Relying on kindness would be a problem if there was some strange charitable reason that foreign persons buy US bonds at interest rates below the "fair" (free market) rate -- that would aritificially depress the borrowing cost and be unsustainable. I highly doubt that anyone gives the US Treasury a discount because they "seem like a good guy" or "remind them of their grandson".

    Even if debt was 100% owned to foreigners, would that be so bad, assuming the US didn't spend too much money making debt service payments.

  • Report this Comment On December 11, 2012, at 5:47 PM, shakyhands wrote:

    The Federal reserve will buy up most of the debt,and everything will be okay.

  • Report this Comment On December 11, 2012, at 5:50 PM, HighVoltage627 wrote:

    Once again, I love your posts Morgan. Its one of the reasons I keep coming back to the Motley Fool.

    One question. You say in the article that China is a net seller of treasuries, because it wants the yuan to rise gradually against the Dollar. You also mention that Japans treasury position is growing like a weed. The points are unconnected, but could one infer that Japans intent is to depress the yen against the dollar?

    Ok. Another question. If you have time, (I know your busy), could you do an article at some point about how treasury positions affect exchange rates? I dont trade forex or anything, so I dont have a direct need to know, but I am suddenly curious?

  • Report this Comment On December 11, 2012, at 5:53 PM, EDJMCPS wrote:

    And who pays the Federal Reserve the cash it needs to buy up the debt? No matter how they do it we loose somewhere down the line. A debt is a debt that never goes away till it is paid for one way or another.

  • Report this Comment On December 11, 2012, at 5:54 PM, KyleSanDiego wrote:

    Very interesting and greatly appreciated article. Thanks for keep us informed with the facts !

  • Report this Comment On December 11, 2012, at 6:01 PM, WhyNot222 wrote:

    "Why all the fuss about China when no one seems bothered by Japan"

    People don't like what it means psychologically. When Japan's economy was hot and they were buying up US real estate, everyone was scared of them. But Japan has peaked at a level below the US. China, on the other hand, is early in their development and as they grow their consumer base internally, will become the premier economic power in the world (won't happen overnight). Basically, the US is where Britain was in the late 1800's. They funded our railroads and westward expansion and then we left them in the dust as our economy took off. China is in the process of doing the same thing and it does not make us feel good, realizing we are going to be usurped as the premier economic engine in the long run.

  • Report this Comment On December 11, 2012, at 6:03 PM, KyleSanDiego wrote:

    I'm a Simpson fan. We need more straight-shooters like him. I'll bet he just got a bit mixed up. China owns over 20% of debt held by foreigners, and 28% if you look at debt issued in last 10 years. Somewhere between those two figures he probably just got mixed up. Very interesting that they are slowly selling it.

  • Report this Comment On December 11, 2012, at 6:07 PM, TMFMorgan wrote:

    KyleSD,

    Likely. Although the "we owe it all to China line" has been rampant for years. I watched a documentary recently that stated, with conviction, "Where did we get all the money [over the last decade]? Mostly, it was borrowed from China." Great headlines, but not true.

  • Report this Comment On December 11, 2012, at 6:38 PM, dmiles2 wrote:

    It's a trivial amount, but who owns Savings Bonds? I bet mostly individuals, and mostly US residents. Savings Bonds don't own themselves.

  • Report this Comment On December 11, 2012, at 6:50 PM, snapperreef wrote:

    Why all the fuss about China when no one seems bothered by Japan?

    I think the fuss just might be because China has been controlled by a brutal dictatorship since the end of WWII when Mao began his takeover. They opposed us and aided our enemy during the Vietnam debacle. They have starved and killed millions of their own people. They have shot down our planes. They sent hundreds of thousands of soldiers to kill our men during the Korean Conflict. Why would anyone think they would do any business with us for any reason that was not beneficial to themselves?

    Right now, it is to their benefit to let us be a net debtor; as soon as it is not, trust me, they will call the debt.

  • Report this Comment On December 11, 2012, at 6:57 PM, TheRealRacc wrote:

    I can't seem to get my head around how China could displace the U.S. as the so-called "global economic leader" with such a lack of transparency across all levels of their government. I would think that they would have to phase out opacity first. Is this happening, or will it?

  • Report this Comment On December 11, 2012, at 7:10 PM, WhyNot222 wrote:

    I think the best way to develop democracy is by building up a strong middle class and creating upward mobility for all levels. As China develops, that will occur and the expectations of the population will increase. It may take a generation or two, but "communism" and the old guard dying out will give way to a new view. It may take longer, but it will be more effective than trying to force the issue from the outside.

  • Report this Comment On December 11, 2012, at 7:11 PM, upatick wrote:

    Thank you for identifying who owns most of the U.S. debt. I'm curious if you can find who owns the U.S. Government Agency debt. I don't think it's included in the Treasury debt, but it is guaranteed by the U.S. government in a similar fashion. There might be another two or three trillion dollars of borrowed money there also.

    Thank you for your effort locating such valuable information.

  • Report this Comment On December 11, 2012, at 7:15 PM, 3rdmardiv wrote:

    It isn't often that I LOL, but the comment by Shakyhand about the Federal reserve buying up the debt was priceless!

  • Report this Comment On December 11, 2012, at 7:15 PM, TMFMorgan wrote:

    << I'm curious if you can find who owns the U.S. Government Agency debt>>

    As far as I know that data doesn't exist. I spent a lot of time digging through Treasury documents for this article and that never showed up.

  • Report this Comment On December 11, 2012, at 7:18 PM, TMFCane wrote:

    Excellent article and breakdown, Morgan. I think the public debt comparison really shows why the debt problem in many of the European stragglers shouldn't be compared to the U.S.'s - with so much public debt on their books, it's more of a pressing need than here at home.

    China's share in particular has always been hyped on virtually every news channel, and it's intriguing to see them with just a 7% share of total debt.

  • Report this Comment On December 11, 2012, at 7:27 PM, maniladad wrote:

    Morgan, A really simple question: If part of the 'debt' is from buying up mortgage-backed securities, is this really a debt? It sounds more like a loan or an investment, backed by the properties mortgaged, and presumably would be repaid at some time.

  • Report this Comment On December 11, 2012, at 7:38 PM, TMFMorgan wrote:

    ^ The Fed has purchased mortgaged backed securities, not the Treasury. The Treasury backs Fannie and Freddie, who back the MBS, so there is some connection there. It's a giant web.

  • Report this Comment On December 11, 2012, at 7:57 PM, NOTvuffett wrote:

    I don't care who is buying the debt. That there is so much debt seems to me to be the salient issue.

  • Report this Comment On December 11, 2012, at 8:14 PM, terryongarland wrote:

    Seems like all the concern over the debt may be misguided according to some, who believe that since we can print all the money we need, we can never go broke.

    That may be true , but it would not forestall a monetary crises and would make the cost of everything go through the roof. I suppose what I am saying is , there is no easy way out, and we are running out of time.

  • Report this Comment On December 11, 2012, at 8:14 PM, wtatm wrote:

    Hi Morgan,

    Great article.

    Question... I'm trying to get my head around the $1.7 trillion in debt owned by the Fed. How exactly does that happen? Since they control the money supply, do they print money and then buy Treasuries with it, thereby releasing the cash into circulation? If so, what happens when those bonds come due? Presumably, they receive cash back for the bonds. Then what happens to the cash?

    Just trying to understand the Fed's role in all of this... and how that $1.7 Trillion impacts the American taxpayer.

    Thanks,

    Jim

  • Report this Comment On December 11, 2012, at 8:23 PM, TMFMorgan wrote:

    << Since they control the money supply, do they print money and then buy Treasuries with it, thereby releasing the cash into circulation?>>

    Yes, exactly.

    << If so, what happens when those bonds come due? Presumably, they receive cash back for the bonds. Then what happens to the cash?>>

    Unless it chooses to reinvest the money, it disappears (the money supply shrinks). This is effectively the mechanics of raising interest rates.

    Also worth noting: Interest payments the Fed receives on Treasuries (actually, any asset it owns) go back to the Treasury (or 98% of interest, something like that). The Fed writes the Treasury a check for tens of billions of dollars every year.

  • Report this Comment On December 11, 2012, at 8:27 PM, TMFMorgan wrote:

    Here's an example of the last part:

    In 2011 the Fed earned $78.9 billion in "net income" from its assets.

    Of that, it gave $76.9 billion to the Treasury.

    http://www.federalreserve.gov/newsevents/press/other/2012011...

  • Report this Comment On December 11, 2012, at 8:41 PM, NOTvuffett wrote:

    Here is a link where BHO explains the fine points of the national debt, lol:

    http://www.youtube.com/watch?v=DyLmru6no4U

  • Report this Comment On December 11, 2012, at 9:17 PM, ahochau wrote:

    Has anyone pointed out to the likes of Warren Buffet and those other 1 percenters who want to pay more in taxes that they are welcome to go out, buy up as many Tresuries as they would like and hand them back to the fed?

    Put your money where your mouth is boys.

  • Report this Comment On December 11, 2012, at 9:25 PM, ynotc wrote:

    So government trust funds own 30% of the total Treasure "bonds". Thats a neet trick.

    Extract money from the people with a promise to pay it back with appreciation.

    Use it for your own purposes i.e. loan it to yourself with a promise to pay it back.

    Rely on the new money coming in to pay for retiring workers (investors).

    Sounds alot like a Ponzi scheme. The only thing keeping this thing afloat is that government determines when and how much you get in benefits.

    If someone called this loan (and any good banker would) it would colapse like a house of cards.

  • Report this Comment On December 11, 2012, at 10:19 PM, SwampBull wrote:

    Another fine fact-a-thon from Mr. Housel. WhyNot222's synopsis of our Sino-phobia (if such a word exists) sounds on track. We fear the day that a non-democracy could overtake our global influence. Let us just hope we do not resort to guns and missiles.

  • Report this Comment On December 11, 2012, at 10:46 PM, NOTvuffett wrote:

    @ahochau, isn't it curious that the oracle of Omaha simultaneously advocates for higher taxes on the elites such as himself, while contesting about a billion that the IRS says he owes, and totally ignoring the fact that there is already a 'service' set up where one can contribute directly to the treasury to pay down the debt. wow, I wonder why so little has been contributed to this fund, lol.

    Do you think the great Mr. Buffett will give 55% of his estate upon his death??! Hell no. He will donate much of it to his philanthropic enterprises, The majority of the remainder I would guess would go into shielded accounts for his heirs.

  • Report this Comment On December 11, 2012, at 11:57 PM, brittlerock wrote:

    Thank you for an informative, fact filled article. It seems that few people understand that democracy is an artifact of western civilization. The Chinese (all of Asia for that matter) does not share this heritage. There is actually very little evidence that democracy is inherently the best form of government. This is merely an assertion. The irony is that we do not really have a democracy, we simply have a belief. In fact, we practice something much closer to a plutocracy.

  • Report this Comment On December 12, 2012, at 1:12 AM, maxemil wrote:

    "Here's an example of the last part:

    In 2011 the Fed earned $78.9 billion in "net income" from its assets.

    Of that, it gave $76.9 billion to the Treasury."

    Doe this mean that the Fed "prints" money, gives it by buying Treasuries in form of loans to the government, collects interests on it and then after giving some back to Treasury keeps $ 2 billion as profit?

    It seems too easy to me for a privately held bank to accumulate such huge capital gains every year - on capital coming from …?

  • Report this Comment On December 12, 2012, at 3:22 AM, Libertarian71 wrote:

    Morgan said: "The Fed has purchased a lot of Treasuries over the last few years, but that was after it slashed its holdings in late 2008 to make room on its balance sheet for emergency programs to stabilize the financial system."

    Maybe the Fed would have had no need for "emergency programs to stabilize the financial system" in 2008 had it not, in the preceding years, kept interest rates artificially low, which induced and fueled the housing bubble.

  • Report this Comment On December 12, 2012, at 3:56 AM, Xrat wrote:

    I'd like to thank TMFMorgan on behalf of us all for responding to the questions posed by readers so promptly.

    An interesting article, made all the better by the rapid follow-up to points raised.

    Well done and thank you!

  • Report this Comment On December 12, 2012, at 6:56 AM, skypilot2005 wrote:

    Other countries send us goods.

    We send them I. O. Us.

    This is great for our standard of living.

    Sky

  • Report this Comment On December 12, 2012, at 11:32 AM, BruceS78 wrote:

    The Government Trust Funds are owed this money and one of the reasons that taxes have to go up is that Social Security now was to dip into its surpluses to fund retirees. Its too bad that Congress didn't ignore these surpluses. Then maybe they would have not reduced taxes during the Bush era while we were fighting the wars in Iraq and Afghanistan. One of the keys to some of the reckless spending during the past 10-15 years has been the surpluses in the Trust Funds.

  • Report this Comment On December 12, 2012, at 11:54 AM, TMFCrow wrote:

    Hi Morgan I enjoyed the article. I'll link to it from the Pro boards, I think members will enjoy it too.

  • Report this Comment On December 12, 2012, at 12:17 PM, johnnyluvsbeachs wrote:

    Morgan:

    Great article. Really great article. Thank you for posting this.

    The content of this message should be required reading in every high school & college in America but then again it sadly wouldn't mean a hill of beans to the vast majority.

    A trillion here, and a trillion there....pretty soon you start to talk about real money ;-)

    John

  • Report this Comment On December 12, 2012, at 12:26 PM, SkepikI wrote:

    Not so fast Morgan: If the government "Trust Funds" categories are what I suspect they are, those funds are SUPPOSEDLY flow through obligations that are owed to INDIVIDUALS... if that is so, and you similarly drill down into the other broad categories, you come up with 47-50% which is close enough for me to believe Simpson. Having said this, your info likely is just enough to incite curiosity and any more would have eye-glazing properties not seen in the modern world.

    I would be very interested in a similar, simple treatment of HOW the Fed "buys" bonds, how they "hold" them and what happens to the bond market when they "unwind" their current position. Not to mention why and when they might have to unwind... a vicious rabbit punch to bond investors and maybe some kind of panic has long been my assumption, but maybe I am wrong.

  • Report this Comment On December 12, 2012, at 12:29 PM, TMFMorgan wrote:

    ^ Alas, they're not what you think they are :)

  • Report this Comment On December 12, 2012, at 2:35 PM, TheDumbMoney2 wrote:

    While the kindness of strangers may not last foreover, China's self-interested need to buy Treasuries in order to keep its currency lower vs. the dollar and prop exports may last a long time, and Japan's desire for the lesser evil of USTs vs. Japanese debt may last for quite some time as well. And companies are basically required to hold tons of treasures (it's how they hold most cash), assuming they sit on large cash piles at all.

    GREAT set of tables. You have a great role to play in cutting through the nonsense and providing us all with readable data. Thanks as always.

  • Report this Comment On December 12, 2012, at 4:23 PM, CluckChicken wrote:

    snapperreef = "Right now, it is to their benefit to let us be a net debtor; as soon as it is not, trust me, they will call the debt."

    You know snapperreef all the debt we issue comes with a due date. Any holder of the debt can say that they want the money earlier then the due date on the debt that they hold but the US is under no obligation to pay back before the due date as long as we make the interest payments on the debt.

  • Report this Comment On December 12, 2012, at 5:09 PM, PedalHard41 wrote:

    What are Gov't Trust Funds? If one is the SSA Trust Fund, it's has zero $$$ since the Gov't borrowed all the $$$ and replaced it with worthless IOU's. As for the Federal Reserve, where's the collateral? Wouldn't it be We The People's $$$ in banks and financial institutions? Benny-boy monetized the debt, and you cleverly state the Federal Reserve owns 10.8% of the debt... So, from the table above 41.2% (Gov't Trust Funds plus Federal Reserve) of the USA debt is actually owned by We The People's bank accounts, savings, IRAs and 401Ks, really scary...

  • Report this Comment On December 12, 2012, at 6:01 PM, TMFMorgan wrote:

    <<the Gov't borrowed all the $$$ and replaced it with worthless IOU's>>

    Also known as Treasuries. $4.8 trillion worth, to be exact.

  • Report this Comment On December 12, 2012, at 10:00 PM, BurdenonSociety wrote:

    I am attaching a link to a GAO Report done in 2001 and using 1999 data entitled Federal Trust Funds and Other Earmarked Funds. This includes a list of some of the larger Federal Trust Funds in Appendix II.

    The link is http://www.gao.gov/assets/210/200562.pdf

    A more detailed source of information on Trust Funds can be found in the "Fiscal Year 2013 Appendix Budget of the U.S. Government. A link to that page turner is: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2...

    These are sources I became very familiar with in my previous life as a Civil Servant.

  • Report this Comment On December 12, 2012, at 10:19 PM, digitalroom wrote:

    no matter how u put it. This country is screwed up and it's just a matter of time before the bitter payback is going to affect all of us!

  • Report this Comment On December 13, 2012, at 1:22 AM, grusilag wrote:

    TMFMorgan said: "Here's an example of the last part:

    In 2011 the Fed earned $78.9 billion in "net income" from its assets.

    Of that, it gave $76.9 billion to the Treasury."

    To be completely accurate, the Federal Reserve did not start paying the interest it collects back to the Treasury until 1947, 34 years after its creation and only by by mandate of the Board of Governors of the Fed itself. As far as I know, nothing in the Federal Reserve Act of 1913 actually requires the Fed to return its profits to the Treasury.

    http://fraser.stlouisfed.org/docs/publications/FRB/pages/194...

    Maxemil said: "Doe this mean that the Fed "prints" money, gives it by buying Treasuries in form of loans to the government, collects interests on it and then after giving some back to Treasury keeps $ 2 billion as profit?

    It seems too easy to me for a privately held bank to accumulate such huge capital gains every year - on capital coming from …?"

    If you think its too easy for the Fed to profit from creating money then you've overlooked the real winners here - the rest of the banking system. The Fed only creates the reserves. The rest of the money supply, the vast vast majority of it, is created by the banks who get to issue money based on those reserves. Its the banks that get to lend newly created money (backed only by the full faith and credit of the U.S.) on interest. And unlike the Fed, banks don't obligate themselves to pay the interest back to the Treasury.

  • Report this Comment On December 13, 2012, at 1:26 AM, TerryHogan wrote:

    @HighVoltage627

    khanacademy.org has a lot of good intro to economics videos. I think a few addressing your exact question. It's free (partially funded by the Gates foundation) A few talk about how the Yuan peg works as well.

  • Report this Comment On December 13, 2012, at 7:46 AM, duane1x wrote:

    The who-holds-what game is interesting. Given a bit of historical context, ten years ago the Major Foreign Holders report stood at $1T. As of Sep 2012 this stood at $5.455T http://www.treasury.gov/resource-center/data-chart-center/ti...

    One can be excused for wondering, in the time of the global financial crisis, hugely increased energy costs, stagnant wages and tax revenue, just how the world manages to fork out the additional four and half trillion dollars. You might argue that precisely in the time of conditions such as these, the world's wealthy flock to invest in the USA as safe haven. And yet the bulk of this increase is attributed to foreign official holdings, or the state itself.

    How does Spain - by all accounts broke, with rioters in the streets and people hurling themselves from apartment windows to protest austerity measures - how does Spain find it within itself to expand its holdings over the last year from $13.1 billion to $24.8? You'd think that 11.7 billion might have been useful at home. Italy and Ireland have increased their holdings as well. We can only assume that Greece, though failing to make the chart, probably has as well.

    Of course you might wonder in turn how the USA, also broke by all accounts, with its large trade deficit every month to go along with its even larger deficit in the halls of government, manages to increase its holdings of the bonds and securities of other countries by a couple of trillion in the last 3 years. The cynical person might imagine that it's a matter of money printing on all sides, and you buy my bonds and I'll buy yours. Or, as in the case of the U.S. and some others - like Japan, it's a case of I buy yours and you buy mine, but that won't be enough so I'll be needing (the Fed) to buy mine too.

  • Report this Comment On December 13, 2012, at 8:48 AM, Greywon wrote:

    With government trust funds owning over 30% of the debt, the federal debt becomes sort of a Kline bottle. When interest rates rise to traditional levels, that "bottle" just might burst.

    Or perhaps a better analogy is that we have a faith-based debt -- faith that interest in the debt will remain low, faith that somehow the debt will not have to be repaid, and faith that the other 90% of the debt-obligations iceberg (which doesn't get much air time) won't bury us.

  • Report this Comment On December 13, 2012, at 9:27 AM, sgt1917 wrote:

    Nice article, but we don't know if its true either.

  • Report this Comment On December 13, 2012, at 9:32 AM, getmenews wrote:

    Ok Ok; How much has we invested overseas?

  • Report this Comment On December 13, 2012, at 9:59 AM, erikinthered100 wrote:

    A nice article but I think it misses the forest for the trees. I would particularly disagree with the following concluding statement:

    "But what's more dangerous than a massive mountain of national debt? Exaggerations and misconceptions about that debt."

    No. "A massive mountain of national debt" is far more important than the exact breakdown of who we owe it too.

  • Report this Comment On December 13, 2012, at 10:38 AM, kyleleeh wrote:

    @erikinthered100

    I disagree, if most of the money the federal government owes is owed to other branches of the federal government and the intrest collected on that debt goes back into the governments coffers then the problem is not that bad.

    I'd be more concerned with the intrest rate then the size of the debt myself, right now our "massive mountain" of debt is costing us less of our GDP per year the we paid in the 90s on a much smaller amount of debt.

  • Report this Comment On December 13, 2012, at 12:35 PM, SkepikI wrote:

    Federal Trust Funds:

    <Alas, they are not what you think they are :)> Well Morgan, looked at one way, yes they are exactly what I thought they were, for the most part. Looked at in LEGALISTIC DETAIL however you are right, they not what I thought of as obligations to individuals owing to the slippery definitions of the Federal Government!

    Thanks to Burdenonsociety for the link to OMB's LARGE mulitpage report on Trust funds That I recommend you SCAN for the statement on Trust Funds which explains that unlike common usage, the Federal Government DOES NOT HAVE A FIDUCIARY OBLIGATION for trust funds! (emphasis mine)

    As a more practical matter however, you might consider what would happen were the Federal Government to repudiate its obligations to Individuals for SSA, Medicare, Indian People etc

    etc.

    Still, putting a fine point on if Individuals residing in America "own" the debt or not, Simpson might not need my defense at all, and its rather unimportant in the larger scheme (I use this word intentionally) of debt. The complicated web of debt that the Federal Government has woven on our behalf looks and smells worse than I thought. This has been a rather useful glimpse of things I never wanted to see....

  • Report this Comment On December 13, 2012, at 12:40 PM, vitom999 wrote:

    So, roughly one third held by foreigner investors, one third by domestic investors, and one third by government trust funds. Is there not, however, a significant difference to the one third held by government trust funds, which is that amount can be changed by changing the funding policy? For example, would not that amount drop considerably if the Soc Security retirement ages became 70? In contrast, no policy change will impact the amount owed to foreign investors. They will still get their money. Is this right?

  • Report this Comment On December 13, 2012, at 12:52 PM, snapperreef wrote:

    CluckChicken "the US is under no obligation to pay back before the due date as long as we make the interest payments on the debt."

    Very true but the Chicoms can always sell their US Treasury debt on the open market which, I believe, will flood the market and cause the value to go down and thus the interest rates on new debt to increase which will hasten the collapse of our currency/economy as if they could call it like a loan.

    I don't know the avg interest on the $16Trillion we owe now, but just think what our interest payments would increase if you raised it 100-200 points?

    160 to 320 billion annual increase on the

    $454,393,280,417.03 we owed in 2011. This is fast approaching $1Trillion itself. And think if we are borrowing to pay the interest how fast it will grow.

    http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

    I don't think I thanked Morgan for this article. It is most enlightening and thought provoking. Who could ask for anything more?

    Thanks Morgan, for this one and many more.

  • Report this Comment On December 13, 2012, at 1:16 PM, TMFMorgan wrote:

    ^ Keep in mind, the $454 billion interest figure is gross interest. The Fed returns interest it earns to the Treasury, and debt held by govt trust funds are paid to the govt. Net interest is the more meaningful figure, and it's about $250 billion.

    You're spot on about even a small jump in interest rates blowing the tab higher.

  • Report this Comment On December 13, 2012, at 1:21 PM, CluckChicken wrote:

    "Very true but the Chicoms can always sell their US Treasury debt on the open market which, I believe, will flood the market and cause the value to go down and thus the interest rates on new debt to increase which will hasten the collapse of our currency/economy as if they could call it like a loan."

    They can sell it and as Morgan has noted they have been selling it. There of course just needs to be people to buy that debt (there are limits to how much any one country can own). Whatever debt that China holds of ours that they sell will in no way impact the amount of interest we pay on that debt.

    I think your big fear is misguided. If China made a major move to trash the US economy they would also end up trashing their own economy. Say the dollar takes a huge drop, that would make imports far more expensive, China exports 17.4% of their goods to the US. Would that amount increase or decrease if they became more expensive? That doesn't even take into account the ripple effect of trashing the value of the dollar when talking about China's other major trading partners (Japan, Germany and South Korea) which are also highly dependent on exports to the US.

    Then you also need to take into consideration the loss on the investment you made when buying the debt.

    Countries do not buy US debt to try and gain power in dealing with the government or economy, they buy it because they feel it is a safe bet and provide them some financial gain.

  • Report this Comment On December 13, 2012, at 4:13 PM, Johny205 wrote:

    Unfunded obligations excluded

    The U.S. government is obligated under current law to mandatory payments for programs such as Medicare, Medicaid and Social Security. The Government Accountability Office (GAO) projects that payouts for these programs will significantly exceed tax revenues over the next 75 years. The Medicare Part A (hospital insurance) payouts already exceed program tax revenues, and social security payouts exceeded payroll taxes in fiscal 2010. These deficits require funding from other tax sources or borrowing.[32] The present value of these deficits or unfunded obligations is an estimated $45.8 trillion. This is the amount that would have had to be set aside in 2009 in order to pay for the unfunded obligations which, under current law, will have to be raised by the government in the future. Approximately $7.7 trillion relates to Social Security, while $38.2 trillion relates to Medicare and Medicaid. In other words, health care programs will require nearly five times more funding than Social Security. Adding this to the national debt and other federal obligations would bring total obligations to nearly $62 trillion.[33] However, these unfunded obligations are not counted in the national debt.

    The Congressional Budget Office (CBO) has indicated that: "Future growth in spending per beneficiary for Medicare and Medicaid – the federal government’s major health care programs – will be the most important determinant of long-term trends in federal spending. Changing those programs in ways that reduce the growth of costs – which will be difficult, in part because of the complexity of health policy choices – is ultimately the nation’s central long-term challenge in setting federal fiscal policy."[34]

    This is from Wikapedia. Our 16 trillion dollar debt doesn't sound so bad compaired to our unfunded obligations!

  • Report this Comment On December 13, 2012, at 4:15 PM, TMFMorgan wrote:

    <<The U.S. government is obligated under current law to mandatory payments for programs such as Medicare, Medicaid and Social Security. >>

    "Under current law " is the key phrase there. Laws change. More here:

    http://www.fool.com/investing/general/2012/11/29/how-to-scar...

  • Report this Comment On December 13, 2012, at 4:21 PM, TMFMorgan wrote:

    <<However, these unfunded obligations are not counted in the national debt.>>

    That's because they are not debt.

  • Report this Comment On December 13, 2012, at 5:23 PM, BurdenonSociety wrote:

    Here is another interesting issue. In the post from Johny205 the following statement is taken. "The U.S. government is obligated under current law to mandatory payments for programs such as Medicare, Medicaid and Social Security.

    In the Barron's issue dated August 13, 2012, page 31 Thomas Donlan shares that Social Security benefits are not legally guaranteed. I will quote the article from here. "In the original 1935 law, Congress reserved the right to change benefits and the Supreme Court upheld it in a case decided in 1960. Paying the payroll tax does not create a right to receive benefits, the court said.

    The court and the law, however, will not withstand the political pressure to pay full benefits, at least to the disabled and to the 50% or retirees who will be living on not much more than their Social Security. The security of Social Security therefore is a political matter, and its chief protection is found in voting booths filled with senior citizens defending what the imagine to be their rights"

    Based on the court and the law, there is no right to receive benefits just because an individual payed into the system. How many people are aware of this fact, and if this issue had been better understood what impact would that have had on a generation of individuals as they planned their financial future.

  • Report this Comment On December 14, 2012, at 11:53 AM, GutArzt wrote:

    Last time I checked, Hong Kong was owned by China, so why do you not total the holdings of HK with China. It results in an error of China holdings of more than 10%. That is signifcant in my opinion.

  • Report this Comment On December 14, 2012, at 1:38 PM, NotJesseL wrote:

    The trader in me says that the delta over time is more important than the position. Since people buying are 44% foreign, it seems to me like they have a powerful lever over short term interest rates that they could potentially use. So, that is another risk. I think Tom Clancy wrote a book about it.

  • Report this Comment On December 14, 2012, at 3:26 PM, register1 wrote:

    Have any of you guys read 5th addition of "The Creature from Jeykll Island" by G Edward Griffin ??? A Second look at the Federal Reserve Seven reasons why the Federal Reserve should be abolished Not an easy read but well worth the effort and time

  • Report this Comment On December 14, 2012, at 4:23 PM, ChrisBern wrote:

    "But what's more dangerous than a massive mountain of national debt? Exaggerations and misconceptions about that debt."

    Good article Morgan, but a mountain of national debt is WAY WAY WAY more dangerous than misconceptions about that debt. :)

  • Report this Comment On December 15, 2012, at 8:22 AM, mapartha wrote:

    You have not got the correct figure on National Debt.

    Wall Street Journal published an article by Chris Cox and Bill Archer entitled: Why $16 Trillion Only Hints at the True U.S. Debt. The key point being: "The actual liabilities of the federal government--including Social Security, Medicare, and federal employees' future retirement benefits--already exceed $86.8 trillion, or 550% of GDP."

  • Report this Comment On December 15, 2012, at 8:43 AM, TMFMorgan wrote:
  • Report this Comment On December 17, 2012, at 4:34 PM, Welfarer wrote:

    After the Second World War, automation killed jobs in factories and on the farm. And what couldn't be automated was shipped overseas. Unions disappeared except for government jobs. Thus the middle class disappeared, and juggling numbers is not going to bring it back!

  • Report this Comment On December 17, 2012, at 5:45 PM, PoorerThanU wrote:

    To answer a question above: yes, Japan does desire (need would be a better term) to devalue the yen. Their economy is export based. They need to sell more to foreigners. The easiest way to spur demand is to make the foreigners' cash worth more, i.e. devalue the yen.

    Almost all OECD countries have embarked on significant money printing adventures. The race to the bottom as some have called it. China has printed massive amounts especially compared to the size of their economy vs ours.

    Morgan, your response to projections of unfunded liabilities is "the last year has seen a dramatic slowing." Is this supposed to make me feel better? or not believe the $80T numbers? Do you treat the pension and unfunded medical disclosures on company financial statements the same? Please let me know so that I can discount your analysis appropriately in the future.

    Do you seriously believe that growth in medical costs will shrink as our population ages? I would like to see a study that explains the assumptions underlying the result. I certainly expect my personal medical outlays to increase over time. Do you plan to seek less medical care in the future, Morgan? Or, maybe you think robots will do it for lower costs...maybe like self checkout at the grocery store or a Ford assembly line? I think these things will come, but not in time to bend the cost curve during my working (and tax paying) lifetime....that's about 25 more years. (Fool willing) :D

  • Report this Comment On December 17, 2012, at 5:52 PM, TMFMorgan wrote:

    <<Do you treat the pension and unfunded medical disclosures on company financial statements the same?>>

    No, because they're not the same. Pension obligations at private companies are contractual obligations. Social Security and Medicare are not.

    <<Do you seriously believe that growth in medical costs will shrink as our population ages? >>

    Again, that's not a prediction. That's actually happening now.

    http://www.fool.com/investing/general/2012/01/20/3-huge-rece...

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