Monday, July 19, 2010

The answer is the domestic private sector

Jim Hamilton used the Federal Reserve Flow of Funds data to present a question: who will buy “the additional $8 trillion in net new debt that would be issued over the next decade under the CBO's alternative fiscal scenario.”

I thought that the analysis was curious and too "partial". If one believes the deleveraging story, then domestic private saving is going to rise. The answer to his question seems pretty obvious…

Let’s say that consumption goes back back to the 1960’s-style 62% of GDP, then get ready for household Treasury accumulation. Spanning the decade of 1960, households held on average 30% of the Treasury's liabilities.

A simple example illustrates my point. If the Treasury’s book doubles to $16.5 trillion, and the household share of Treasury holdings rises to 30% – as of Q1 2010 the stock of Treasuries outstanding was just about $8.3 trillion (see L.209 here) – then households will accumulate over $4 trillion of those new Treasuries. That's just households, and holding all else equal (like financial funds and businesses).

So the answer is: the domestic private sector.

Rebecca Wilder


  1. the debt in the 60s was in the range of $250B and a lot of people were still buying $50 and $100 US savings bonds, because they believed it was patriotic...think that kind of patriotism can be reinstilled today?

  2. There was actually a resurgance in the '90s with the decent return - ones i bought are just hitting the end of paid interest - i would buy again IF...

  3. aj, i assume that "IF" means "decent return" and that's probably going to be the case with a lot of us...but that implies a higher cost of servicing what will be approaching 20T in treasury debt...

    i wonder if there's a way to work that so higher interest rates savings bonds can only be bought by individual US citizens, and not foreigners or financial institutions...

  4. rj,

    It's not going to matter. Saving will rise - and in order to do so, the government must spend in excess of what it taxes the private sector (because the government has a monopoly over the supply of money, it must spend in order to add reserves to the banking system in excess of what consumers pay in taxes and consume) in order to "finance" desired saving on the part of the private sector. Yes, they will buy Treasuries - that's a form of wealth accumulation, and "safe" as well. Stocks are risky, corporate bonds are risky, where else do you go? I guess one could hold cash - but that's all a Treasury is, a substitute for cash. I would take the Treasury.

    I wonder: what do you think will be the world's reserve currency in 15, no 30 years?? My bet's on the $US.


  5. Hi aj!

    I would always buy - the government can ALWAYS pay it back. Debt financing is not an issue on the part of the US government, where the $US is not convertible into anything but itself and the debt is issued in $US.

    Hi to Jackie!


  6. on the reserve currency: for demographic reasons, the euro and yen will play an increasingly less important role on the world stage...we might see SDRs play an increasing role, but over the long term, i'd be guessing we end up with two supra-regional reserve currencies, the dollar and the renminbi..

  7. Yes, it all comes down to best return on investment in the sector. Funny how I can get much better return at a credit union than a bank - except that sometimes i can get a better deal from friends who work there. That's another interesting fact - it may depend on who you know, not what they pay.
    Jackie says "Hi" to you! 

  8. Sorry, I didn’t phrase that question right. I meant “what is the point of borrowing rather than printing money where the objective is stimulus. Put another way, what is the point of Keynsian “borrow and spend” rather than “print and spend”?

  9. that was fast...

    U.S. Investors Regain Majority Holding of Treasuries -  Bloomberg

    For the first time since the start of the financial crisis in August 2007, U.S. investors own more Treasuries than foreign holders. Mutual funds, households and banks have boosted the domestic share of the $8.18 trillion in tradable U.S. debt to 50.2 percent as of May, according to the most recent Treasury Department data. The last time holdings were as high, Federal Reserve Chairman <span>Ben S. Bernanke</span> cut interest rates for the first time between scheduled policy meetings as losses in subprime mortgages spurred a flight from riskier assets.  Demand for Treasuries from U.S. investors is climbing as consumer spending and incomes stagnate and the savings rate reaches the highest level in almost 18 years -- 6.4 percent in June. The retrenchment by individuals, as well as banks buying government bonds instead of increasing lending, is driving yields lower as President <span>Barack Obama’s</span> administration borrows record sums to finance an unprecedented budget deficit.“Americans are consuming less and saving more,” . “That causes an increase in savings and deposits, which end up being invested in government securities.”