Popular belief is that China holds the greatest portion of our debt. But that distinction belongs to the Federal Reserve (Fed).
As most readers are aware, the national debt is gargantuan. The total owed is approximately $17.35 trillion. This translates into $54,472 per person or $149,968 per taxpayer.
Managed by the U.S. Treasury, the national debt comprises two components: debt held by the public ($12.35 trillion) and intragovernmental holdings ($5 trillion). The latter is debt owed to 230 federal agencies such as the Social Security Trust Fund and the Military Retirement Fund and consists of excess cash transferred by the agencies to the Treasury.
Latest available data reveal the Fed owned $2.16 trillion of the public debt in the form of government securities – Treasury bills, bonds, and notes – at the end of 2013. This amount was $890 billion more than the $1.27 trillion owned by entities in China.
These numbers sharply contrast with the amounts owed in January 2009, when President Obama took office. At that time, the positions were reversed. China had $744.2 billion in government securities to $475.2 billion held by the Fed.
During the intervening years, the Fed dipped its toes into uncharted waters. It used unconventional monetary policy, purchasing large volumes of government securities, in an attempt to jump-start the economy. In addition to being the largest purchaser of government securities, the Fed holds $1.49 trillion in mortgage-backed securities also purchased to bolster the economy.
The Fed’s policy of purchasing securities, both Treasuries and mortgage-backed instruments, has been widely criticized in some circles. Various economists and politicians, both Democrat and Republican, have voiced concerns about the magnitude of the national debt.
They are especially worried about the amounts required to service the debt – to pay the interest as it comes due – now running about $230 billion per year. Rather than paying off the indebtedness, the Treasury pays the interest by issuing new securities.
Erskine Bowles, President Clinton’s chief of staff and co-chairman of the National Commission of Fiscal Responsibility and Reform, is the latest Democrat to speak on the issue. He recently pointed out that if interest rates were to rise to the level of the 1990s, “we’d be spending not $230 billion a year but $650 billion per year.”
Wayne Curtis, Ph.D., is a former superintendent of Alabama banks and a Troy University business school dean. He is retired from the board of directors of First United Security Bank. Email him at email@example.com.