Monday, March 16, 2009

Major Foreign Holders of Treasury Securities (update)

According to a number of news stories, Chinese Premier Wen Jinbao expressed concerns about China's holdings of U.S. government debt on March 13th. Following is the opening paragraph in a March 14th article in the Washington Post:

Exerting its new influence as the U.S. government's largest creditor, China yesterday demanded that the Obama administration "guarantee the safety" of its $1 trillion in American bonds as Washington goes further into debt to combat the economic crisis.

Further on, the article states:

China surpassed Japan last year as the largest foreign holder of Treasury bonds. Any indication that it intends to cease those purchases -- or, worse, stage a sell-off -- could drive up the cost of borrowing for the U.S. government, as well as send mortgage rates higher for millions of Americans.

To my knowledge, the chief source for the amounts of Treasuries held by foreign countries is the Treasury Department. Each month, it posts updated estimates of the foreign holdings of U.S Treasuries by country at this link. It also posts estimates going back to March 2000 at this link. The following graph shows the totals for all countries by the type of treasury security and the totals for the four countries (or groups of countries) with the largest holdings at the end of 2008.

The blue line shows the grand total of all treasury securities held by all foreign countries, private and public. As can be seen, it has been increasing steadily since early 2002 and accelerated sharply at the end of 2008. The yellow line shows those securities held by "official institutions", defined on page 7 of the Report on U.S. Portfolio Holdings of Foreign Securities at End-Year 2004 as follows:

Official institutions consist primarily of national government and multinational institutions involved in the formulation of international monetary policy, but also include national government-sponsored investment funds and other national government institutions. Data on such institutions are collected separately because the motivations behind holdings of official institutions may differ from those of other investors.

The dark blue line just below the yellow line shows the totals for bonds and notes which are that portion of the total securities that are long-term debt securities, with an original
maturity of over one year. As can be seen, this long-term debt has not been increasing over the past half-year. Hence, the increase over this period appears to have been totally in short-term debt. More details on short-term and long-term debt securities can be found on page 7 of the Report on U.S. Portfolio Holdings of Foreign Securities at End-Year 2007.

The other four lines show the holdings of the four categories of countries with the largest holdings. These can be seen in more detail in the following graph which shows the holdings of the eight countries with the largest holdings:

The actual numbers and sources for both of the above graphs can be found at this link. As can be seen, the holdings of Mainland China has risen steadily since early 2002, increasing nearly ten-fold from $76.5 billion in February of 2002 to $727.4 billion at the end of 2008. As mentioned in the article, China did surpass Japan as the largest foreign holder of Treasuries in September of 2008. In fact, Japan's holdings reached a maximum of $699.4 billion in August of 2005 and have fallen to $626 billion now. Also, I noticed a few other interesting things in the data. The United Kingdom's holdings soared from $50 billion in June of 2007 to $271.2 billion in May of 2008 and then dropped back to $55 billion in June of 2008. In fact, there appears to be a large continuing discontinuity between each annual survey for the United Kingdom causing a large saw-tooth effect in the graph. If anyone knows the reason for this, please leave a comment.

In any case, there are a number of other countries whose holdings have increased rapidly for some portion of the past eight years. The holding of Oil Exporters have more than quadrupled from $43.9 billion in January of 2004 to $186.2 billion now. The holdings of Brazil went up by more than a factor of ten from $14 billion in January of 2005 to $158 billion in June of 2008 but have sunk back somewhat to $127 billion now. The most recent rapid increase has been in the holdings of Russia which has gone up by more than a factor of fifteen from $7.4 billion in March of 2007 to $116.4 billion now. I would guess that most of this investment from Oil Exporters, Brazil, and Russia came from income from resources, chiefly oil. With oil having fallen from a high of $147 per barrel last July to the mid-forties now, it would have seemed likely that future investment in Treasuries by these nations would have fallen. However, only Brazil's investment had begun to decrease by the end of 2008. In addition, it would seem possible that China's future investment might slow due to it's own stimulus plans or for other reasons. The Washington Post article says the following on that topic:

Wen, however, stopped far short of saying China would cease purchasing Treasurys. Although analysts say China may already be moving to curb some purchases of U.S. debt, any move to sell off its current holdings would severely deflate their value on world markets -- hurting the Chinese as well as the Americans. Years of red-hot growth have allowed China to build up the world's largest reserves -- some $2 trillion. But analysts say almost half are held in U.S.-government-backed debt.

One final item of note is that the Washington Post article mentions Chinese holdings of "$1 trillion in American bonds". However, the Treasury figures show that China held just $727 billion in treasuries at the end of 2008. It seems likely that the $1 trillion figure includes holdings in Fannie Mae and Freddie Mac bonds. A September 18th New York Times article stated the following regarding China:

Its bond holdings of government-sponsored enterprises, estimated by credit rating agencies at $340 billion, rose in value by billions of dollars in a single day when the Bush administration made explicit the government guarantee of Fannie Mae and Freddie Mac bonds, causing their interest rate spreads compared with Treasury bonds to narrow by 5 to 35 basis points within hours.

The exact amount of China’s gain cannot be calculated without knowing the maturity and composition of its holdings of these bonds, which Chinese officials have not released, according to specialists in fixed-income securities.

Monday, March 2, 2009

Fiscal Year 2010 Budget Overview Document

An overview of the fiscal year 2010 U.S. Budget was released on Thursday, February 26th. A link to the overview can be found on this page, along with the following description:

A New Era of Responsibility: Renewing America’s Promise, provides a description of the Obama Administration’s fiscal policies and major budgetary initiatives. This document is an overview of the full Fiscal Year 2010 Budget expected to be released this spring.

The overview contains 9 summary tables which give actual budget numbers for 2008 and projected numbers for 2009 through 2019. These numbers can be combined with historical budget numbers from the prior budget to look at historical and projected budget data from 1940 through 2019. The following graph shows selected measures of the deficit since 1970:

The most commonly discussed measure of the deficit is the unified deficit, shown in purple. The graph shows the actual values of the unified deficit through 2008 and projected values from 2009 forward. In addition, the dotted purple line shows the projected values of the unified deficit from last year's budget. The actual numbers and sources can be found at this link.

As can be seen, the extraordinary financial crisis has caused the outlook for the unified deficit to change radically. The prior budget projected that it would become a surplus in 2012 while the current budget projects that it will skyrocket to $1.75 trillion this year and decrease to $581 billion by 2012.

In any event, the graph also shows the change in the debt held by the public (the blue line), referred to as the public deficit. This is usually very close to the unified deficit as the government must generally make up for the difference between receipts and outlays by borrowing from the public. However, the graph and table show that the debt held by the public is projected to increase by $2.56 trillion in 2009, well over the projected unified deficit of $1.75 trillion. Table S-9 in the overview shows that this difference is chiefly due to Direct loan accounts ($482 billion), Troubled Asset Relief Program (TARP) equity purchase accounts ($202 billion), and Financing accounts for potential additional financial stabilization efforts ($432 billion).

Finally, the graph shows the change in the gross federal debt (the red line), referred to as the gross deficit. This is equal to the public deficit plus those monies borrowed from Social Security and the other trust funds. As can be seen, the gross deficit is projected to reach $2.72 trillion in 2009, descend to just under a trillion dollars per year by 2012, and maintain that general level until 2019.

Regardless of the significance of the deficit, the federal debt is arguably more critical. Afterall, it is the debt, not the deficit, that we are paying interest on every year. The following graph shows selected measures of the U.S. debt since 1940:

The actual numbers and sources for this graph can be found at this link. As can be seen, the gross federal debt is projected to jump from 70.2% of GDP to 89.2% of GDP in 2009 and reach 98.3% of GDP by 2011. As the graph shows, that is not far from the historic peak that we reached in World War II. Unlike the end of that war, however, there is no sharp drop in the debt to GDP ratio when the current economy improves. That is because the budget is projected to stay well in deficit through 2019 with unified deficits around 3 percent of GDP and gross deficits around 5 percent of GDP. That's very unlike the end of World War II when the drop in war expenditures allowed the budget to achieve approximate balance for the next decade or more.

On the positive side, the overview contends that these numbers are more realistic than some prior budgets. On page 36, it states:

This Budget, therefore, provides a projected cost for the wars in Iraq and Afghanistan; does not assume that all of the 2001 and 2003 tax legislation magically disappears at the end of 2010; does not allow the alternative minimum tax to take over the tax code, which almost every observer agrees is unrealistic; recognizes the statistical likelihood of natural disasters instead of assuming that there will be no disasters over the next decade; includes a contingent reserve as a placeholder in case further legislative action becomes necessary to stabilize the financial system; and provides a 10-year rather than a 5-year look into our fiscal situation.

Of course, projections are likely to become less and less accurate the further into the future they extend. Look at the radical change in projections that the current financial crisis caused in just one year. Still, it seems responsible to at least attempt to plan for the future, especially the relatively near future of ten years. Even more important, it seems critical to provide the public with numbers that are as realistic as possible. The more accurate a picture that the electorate has of our current situation, the more likely they are to support those actions which will best address it.

About Me

I became interested in U.S. budget and economic matters back in 1992, the first time that I remember the debt becoming a major issue in a presidential election. Along with this blog, I have a website on the subject at I have blogged further about my motivations for creating this blog and website at this link. Recently, I've been working on replicating studies such as the analysis at this link.

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