Wednesday, February 11, 2009

$3 Trillion! From Where?

Between the jumbled adirectional nonsense that adds up to over $800 billion in the stimulus bill, and Timothy Geithner's plans to stem the tide of the credit crisis, we are looking at a federal government that is on the verge of spending, in one fell swoop, $3 trillion. Considering the approval, quite unfortunately, looks like it is going to take place, the rumblings are beginning to grow as to just where, exactly, our government is actually going to get this money.

Typically the US Government, when increasing the debt ceiling, will issue auctions on
US Debt Securities, in obtaining the capital it needs to carry out its excessive spending. This is undoubtedly the path to raising the money that the government will intend to take again. But there is a problem in this.

On February 10, 2009, Congressman Mark Kirk appeared on the
Roe Conn show on WLS in Chicago. He began expressing this same concern about where we were going to get the money. Kirk mentioned several fairly incredible figures in the interview. First and foremost, the amount of total money we are looking to borrow is six times the amount we've ever borrowed in one year ever before.

Almost more disturbing is the actual volume of borrowing we are going to need to pull off as a country. Kirk explained that a substantial amount of the government's debt issuances are a very short-term variety, only four weeks. This necessitates that the government actually borrow substantially more than initially necessary, since it will auction a new short-term security to pay off a previous one, similar to someone paying off one credit card by taking out another one. His estimate in regard to this process was that the country was going to need to average borrowing $150 billion every week for 52 weeks. Now, this works out to something on the line of $7.8 trillion, so I, as did Roe Conn, thought this number fairly dubious. However, when pressed, Kirk explained that it was due to that short-term nature of most government debt. After
looking things up, it seems that these would be issued as Treasury Bills, which have maturities ranging from a few days up to a year.

OK. Now, assuming we can pull off borrowing this much money in the next year, where exactly is it going to come from? Looking at the breakdown of
our country's debt, it is broken into two categories. Slightly less than half of the country's debt is allocated entirely to the "Federal Reserve and Intragovernmental Holdings." Slightly more than half of the debt is in Securities Held by the Public. As of November 2008, this amounted to about $6 trillion, half of which is held by foreign investors. Over half of that $3 trillion owed to foreign countries is held by China, Japan and the UK.

Yesterday, (February 10, 2009) the US
held a debt sale on 3-Year Treasurys in the amount of $32 billion. This is going to be followed by $21 billion in 10-year notes today, and $14 billion in 30-year notes tomorrow. The breakdown of buyers of the $32 billion in 3-year notes should give us a good idea of where our overall $3 trillion might come from. The Reuters article linked indicates that 55% of the $32 billion was bought up by "indirect bidders, including foreign central banks," the highest such percentage since November 2004.

If this is the trend that should continue in our issuance of public debt, of $3 trillion, $1.65 trillion more of our public debt will be held by foreign interests. This would bring our total debt held by the public to about $9 trillion, of which about $4.65 trillion would be held by foreign interests. That is over half of our country's debt. The usual defense of our country's taking so much debt has always been that we owe the money to ourselves. After this year, it seems that this will no longer be the case.

Of course this is all assuming that we are even able to sell this much debt. While the intense interest in yesterday's debt sale has helped ease some of the general misgiving about government debt sales that has grown after the failure of a recent
German bond sale, let's remember that interest in $32 billion is still a very far cry from interest in $3 trillion.

As of this morning, on the heels of Congressman Kirk's interview with Roe Conn yesterday, WLS has reported that China has announced they will only be buying up another $150 billion in US Debt, because they already hold too much. This is fairly unsurprising as China is having its own
recessionary troubles right now. Japan, too, our second-largest debt holder, is in recession, and the UK doesn't have enough money in its entire government to take care of its own banks, let alone buy more of our debt.

next highest debt owners are the Caribbean Banking Centers and the collected Oil Exporting Countries, including Iran, Iraq, Saudi Arabia, the UAE and Venezuela.

Considering that our biggest three creditors are unlikely to be able to help us here, it seems we find ourselves in a position to be relying very heavily on a collection of countries that we have a tenuous relationship with, at best.

What happens if we extend our change cup, and they just walk by?

1 comment:

  1. Simplify the currency so it is easy for each American to print at home and make everyone promise to not print more than they need.