Who Owns the U.S. National Debt?

The Biggest Owner Is You!

The U.S. debt is $21 trillion. Most headlines focus on how much the United States owes China, one of the largest foreign owners. What many people do not know is that the Social Security Trust Fund, aka your retirement money, owns most of the national debt. How does that work, and what does it mean?

The Debt Is in Two Categories
The U.S. Treasury manages the U.S. debt through its Bureau of the Public Debt.

The debt falls into two broad categories: Intragovernmental Holdings and Debt Held by the Public.

Intragovernmental Holdings. This is the portion of the federal debt owed to 230 other federal agencies. It totals $5.6 trillion, almost 30 percent of the debt. Why would the government owe money to itself? Some agencies, like the Social Security Trust Fund, take in more revenue from taxes than they need. Rather than stick this cash under a giant mattress, these agencies buy U.S. Treasurys with it.

By owning Treasurys, they transfer their excess cash to the general fund, where it is spent. Of course, one day they will redeem their Treasury notes for cash. The federal government will either need to raise taxes or issue more debt to give the agencies the money they will need.

Which agencies own the most Treasurys? Social Security, by a long shot. Here's the detailed breakdown as of December 31, 2016.

Social Security (Social Security Trust Fund and Federal Disability Insurance Trust Fund) - $2.801 trillion
Office of Personnel Management Retirement - $888 billion
Military Retirement Fund - $670 billion
Medicare (Federal Hospital Insurance Trust Fund, Federal Supplementary Medical Insurance Trust Fund) - $294 billion
All other retirement funds - $304 billion
Cash on hand to fund federal government operations - $580 billion.
Debt Held by the Public. The public holds the rest of the national debt ($14.7 trillion). Foreign governments and investors hold nearly half of it. One-fourth is held by other governmental entities. These include the Federal Reserve, as well as state and local governments. Fifteen percent is held by mutual funds, private pension funds and holders of savings bonds and Treasury notes. The remaining 10 percent is owned by businesses, like banks and insurance companies. It's also held by an assortment of trusts, companies, and investors.

Here's the breakdown of holders of the public debt as of December 2016:

Foreign - $6.004 trillion
Federal Reserve - $2.465 trillion
Mutual funds - $1.671 trillion
State and local government, including their pension funds - $905 billion
Private pension funds - $553 billion
Banks - $663 billion
Insurance companies - $347 billion
U.S. savings bonds - $166 billion
Other (individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors) - $1.662 trillion.
This debt is not only in Treasury bills, notes and bonds but also Treasury Inflation Protected Securities and special state and local government series securities.

As you can see, if you add up the debt held by Social Security and all the retirement and pension funds, nearly half of the U.S. Treasury debt is held in trust for your retirement. If the United States defaults on its debt, foreign investors would be angry, but current and future retirees would be hurt the most.

Why the Federal Reserve Owns Treasurys
As the nation's central bank, the Federal Reserve is in charge of the country's credit. It doesn't have a financial reason to own Treasury notes. So why did it double its holdings between 2007 and 2014?

That's when it ramped up its open market operations by purchasing $2 trillion in Treasurys. This quantitative easing stimulated the economy by keeping interest rates low. It helped the United States escape the grips of the recession.

Did the Fed monetize the debt?

Yes, that's one of the effects. The Fed purchased Treasurys from its member banks, using credit it created out of thin air. It had the same effect as printing money. By keeping interest rates low, the Fed helped the government avoid the high-interest rate penalty it would usually incur for excessive debt.

The Fed ended quantitative easing in October 2014. As a result, interest rates on the benchmark 10-year Treasury note rose from a 200-year low of 1.442 percent in June 2012 to around 2.17 percent by the end of 2014. F

On September 29, 2017, the Federal Open Market Committee said the Fed would begin reducing its Treasury holdings in October. Expect long term interest rates to rise as a result. For more, see FOMC Meeting Statement Summary.

Foreign Ownership of U.S. Debt
In February 2018, China owned $1.18 trillion of U.S. debt. It's the largest foreign holder of U.S. Treasury securities. The second largest holder is Japan at $1.06 trillion. Both Japan and China want to keep the value of the dollar higher than the value of their currencies. That helps keep their exports affordable for the United States, which helps their economies grow. That's why, despite China's occasional threats to sell its holdings, both countries are happy to be America's biggest foreign bankers. China replaced the United Kingdom as the second largest foreign holder on May 31, 2007. That's when it increased its holdings to $699 billion, outpacing the United Kingdom's $640 billion.

Ireland is third, holding $314 billion. The Cayman Islands is fourth, at $252 billion. The Bureau of International Settlements believes it is a front for sovereign wealth funds and hedge funds whose owners don't want to reveal their positions. So are Luxembourg ($218 billion) and Belgium ($126 billion).

After the Cayman Islands, the next largest holders are Brazil, the UK, Switzerland, Hong Kong, Taiwan, Saudi Arabia, and India. They each hold between $144 and $273 billion.

Data are from various reports that are released at different times. Therefore, the numbers in this article may not add up to the total U.S. debt of $21 trillion.

URL: [thebalance.com]