I think we can all agree that there has been plenty to be concerned about in the last, say, five years. Some are environmental issues, some are social and, for community bankers, plenty are economical. What gets a lot of play in the business, and even mainstream media, is our growing national debt. There’s no doubt that the mountain of borrowings that keeps our federal government liquid and solvent is greater than ever before. It’s not surprising to me that there’s spirited debate about debt limits, or if Congress will ever in our lifetimes find a way to slow our dependence on deficit spending. Related to this conversation is the concern that, to paraphrase Blanche DuBois, we have always depended on the kindness of strangers. It seems self-evident that foreign central banks have propped up our debt market for decades, buying dollar-denominated securities by the trillions, thereby keeping our borrowing costs manageable, and potentially even encouraging our bad behavior by going ever deeper in debt. But is any of this true? WALKED, THEN RAN First, let’s try to get our minds around the situation. The Federal government first borrowed money before there was a Federal government, when the Dutch and the French loaned money to the Continental Congress to help finance the Revolutionary War. Treasury borrowings, as we know them today, sort of date back to World War I, with the issuance of “Liberty Bonds,” which was just after the creation of the Federal Reserve Bank. As we have seen, the Treasury and the Fed have a long history of collaboration. Even at the start of the 21st century, total Treasury debt was “only” $3 trillion at a very manageable 30% of GDP. Just four years ago, our borrowings were about $17 trillion at 77% of GDP. Today? We’re over $24 trillion, nearly 100% of GDP. While it would be tempting to blame a lot of the more recent growth on COVID and the fiscal response to that, the reality is each administration of the last quarter century has contributed to the current debt stockpile. And, now that rates are at a 15-year high, our interest payments alone are now over $900 billion per quarter. As Craig Dismuke, Market Strategist for Stifel, is fond of saying, “Interest is an expenditure that doesn’t create jobs.” BEDROCK OPTION Now, for some hopeful commentary. The owners of our Treasuries are a diverse lot, with diverse objectives. Investors include the savings bond/ retail buyers, institutional money managers who run mutual funds, depositories, our central bank, and yes, other sovereign central banks. What’s interesting to note is that the percentage of our debt owned by China, Japan, Germany and the rest of the foreign investors has declined substantially in the last decade, from about 42% to less than 30%. The Federal Reserve, meanwhile, has picked up the pace and has essentially absorbed the pro-rata share of the pie in the last decade. So it would be wrong to conclude we’re hostage to foreign governments’ largesse. Still, that leaves around half of our total debt in the hands of private investors. Who are these people? Most are names you’ve heard of, and maybe even invested your personal WORLD-WIDE DEMAND Buyers of U.S. Debt Come in Many Shapes and Sizes By Jim Reber ICBA Securities, ICBC Preferred Provider THE OWNERS OF OUR TREASURIES ARE A DIVERSE LOT, WITH DIVERSE OBJECTIVES. 26 | INDEPENDENT REPORT
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