PeakTrader.com

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PeakTrader:

October 9, 2013

“As of Sept. 30 the federal government’s total debt stood at $16.74 trillion

28.4% of the debt (about $4.76 trillion) was owed to another arm of the federal government itself.

The single biggest creditor, in fact, are Social Security’s two trust funds, which together held $2.76 trillion in special non-traded Treasury securities (16.5% of the total debt). Social Security revenues exceeded benefit payments for many years; the surplus was required by law to be invested in Treasuries.

Another big holder: the Federal Reserve system, which collectively held nearly $2.1 trillion worth of Treasuries (12.4% of the total debt) as of last week. (The Fed’s holdings are included in the “debt held by public” category.)

In fiscal 2013, which ended Sept. 30, net interest payments on the debt totaled $222.75 billion, or 6.23% of all federal outlays. (The government paid out an estimated $420.6 billion in interest, but that included interest credited to Social Security and other government trust funds, as well as a relatively small amount of offsetting investment income.)

Largely due to the Federal Reserve’s aggressive efforts to keep interest rates low, the U.S. government is paying historically low rates on its debt.

Though many people may believe that “China owns our debt,” as of July (the latest month available) China’s Treasury holdings amounted to about $1.28 trillion, or 7.6% of the total debt. China is, however, the United States’ largest overseas creditor, ahead of Japan, which holds more than $1.1 trillion in Treasuries.”

Chart of average interest rate on public debt

http://www.pewresearch.org/files/2013/10/debt_interest1.png

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Some general points:

If interest rates double, the net interest actually paid will double, from $222 billion to $444 billion, and when interest credited on (unfunded) government programs are included, it’ll double from $420 billion to $840 billion.

The Fed buys Treasury bonds from the government and then gives the government the interest on those Treasury bonds.

China cannot sell its holdings of U.S. Treasury bonds, like Japan, without a fall in exports, and therefore output.

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Marque2, you don’t know what you’re talking about.

It would be in China’s best interest to have the yuan as the world’s reserve currency. It would boost living standards tremendously. It would mean more goods per person. China could expand both monetary and fiscal policies, to promote growth, without causing inflation.

China’s goods don’t have much market power. So, it can continue to sell goods cheaply, to maintain export growth, while imports boomed. The yuan wouldn’t have to appreciate, although it’s value would be higher than it otherwise would be. However, China would be able to sell its goods at a higher price, if it wanted profit rather than employment.

Manufacturing may fall only because China would have a building and employment boom in shopping malls and retail stores.

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And, the U.S. hasn’t lost its manufacturing industry. It has shifted from low-end to high-end manufacturing. Also, (limited) resources were shifted into Information and Biotech Revolution firms, where the U.S. not only leads the world (in both revenue and profit), it leads the rest of the world combined.

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It should be noted, although U.S. trade deficits hit record levels in the 2000s (up to $800 billion a year), U.S. export growth averaged about 9% a year, much faster than nominal GDP growth (real GDP growth and inflation).

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China sells its goods too cheaply and lends its dollars too cheaply to raise or maintain its output, employment, and exports, while generating a consumption-investment cycle in the U.S..

Here’s what James Fallows wrote:

James Fallows studied American history and literature at Harvard, where he was the editor of the daily newspaper, the Harvard Crimson. From 1970 to 1972 Fallows studied economics at Oxford University as a Rhodes scholar.

January/February 2008

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China.

Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does.

Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden. The average cash income for workers in a big factory is about $160 per month. On the farm, it’s a small fraction of that. Most people in China feel they are moving up, but from a very low starting point.

This is the bargain China has made—rather, the one its leaders have imposed on its people. They’ll keep creating new factory jobs, and thus reduce China’s own social tensions and create opportunities for its rural poor. The Chinese will live better year by year, though not as well as they could. And they’ll be protected from the risk of potentially catastrophic hyperinflation, which might undo what the nation’s decades of growth have built. In exchange, the government will hold much of the nation’s wealth in paper assets in the United States, thereby preventing a run on the dollar, shoring up relations between China and America, and sluicing enough cash back into Americans’ hands to let the spending go on.

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