Danger! The National Debt Is Growing – But Who’s Buying the U.S. Bonds?

P. Gardner Goldsmith | October 31, 2018
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Apologies for being the bearer of bad news, but this information might be valuable to you.

Despite what some might have hoped or expected given the overtures of President Trump and the GOP about reducing the economic burden of the federal government, the U.S. debt is, as is usually the case, skyrocketing.

Mike Maharrey spells it out in a piece for The Tenth Amendment Center.

The Republican “Party of Fiscal Responsibility” continues to rack up debt at a staggering rate. The U.S. Treasury plans to borrow another $425 billion in the final quarter of 2018, bringing total borrowing for the year to $1.34 trillion, according to a Treasury Department press release.

This is more than twice the debt accumulated in 2017. And there is no end in sight. Maharrey points out that the Administration expects to borrow another $356 billion in the first quarter of 2019, alone.

And the borrowing can’t even keep up with the overdrafts.

All of this borrowing is necessary as the current administration, in cahoots with the Republican Congress, keeps running up massive budget deficits. The 2018 fiscal year ended Sept. 30 and the U.S. government closed out the year with its largest budget deficit since 2012. Uncle Sam ended 2018 $779 billion in the red, adding to the ballooning national debt.

How does this effect the economy? It’s not a dry, complicated, or tedious exercise to spell it out.

First, that means that the Treasury Department will have to continue issuing bonds, and the Department will have to offer them at lower prices and higher rates of return. After all, by increasing the quantity without a recognized increase in demand, a supplier must decrease cost, and/or increase the value to the consumer in order to attract buyers.

That has an effect on interest rates in general, and on the Federal Reserve, specifically.

In general, this will push new bond yields up, which will have a secondary effect on the relative sale value of current bonds that are yielding lower rates of return. This is a bad thing, and could lead to a bond crisis.

It also ties-in to Federal Reserve interest rates and bond buying policies, which are dictated partially by the arbitrary caprice of the Board Governors and Chair, but also by the return the government can offer on bonds. So, as Maharrey notes:

Over the last decade, the U.S. government could always count on the Federal Reserve to buy its paper if nobody else would. The central bank gobbled up billions of dollars in U.S. debt through its quantitative easing program in the wake of the 2008 crash. But now the Fed is tightening. The Federal Reserve shed $152 billion through the end of August as part of its QE unwind. It now holds $2.294 trillion in U.S. debt. So, the three biggest buyers of U.S. Treasuries aren’t buying. No wonder bond yields (i.e. interest rates) continue to go up. In fact, earlier this month, the 10-year U.S. Treasury yield hit the highest level since 2011. That’s not good news in an economy built on piles of debt.

To be frank, most of us likely are aware that the pristine and unbiased Fed seems to play favorites for certain Administrations, and it’s possible that the mighty bank with the government-granted currency monopoly might be working to harm Donald Trump by turning up the interest rates, when it kept them artificially low and bought tons of U.S. debt under Obama.

But if the Fed, for whatever reason, is steering clear of U.S. debt instruments (i.e. short-term and long-term bonds), who’s buying more bonds?

Many people think the Chinese “own” America, through this process. But, like the Russians did starting in 2009 after the U.S. embarked on its economically counterproductive “American Recovery and Reinvestment Act,” “TARP, and the Fed’s Operation Twist, the Chinese have dropped massive amounts of US debt holdings. After all, who wants to hold onto a bond that will be repaid with inflated currency made out of thin air?

Maharrey stresses this reality:

According to the most recent Treasury Department data, China’s holdings of U.S. Treasuries fell for the third consecutive month in August. The Chinese shed another $6 billion in U.S. debt, dropping its total holdings to $1.165 trillion. Over the last year, China’s holdings of Treasury bonds fell by $37 billion year-on-year.

So, if not the Chinese, or Russians… Then?

You guessed it, the U.S. Government.

Nearly one-third of U.S. debt instruments are bought by the U.S. government, and that will increase as the buyers for the public Treasuries decrease.

As Kimberly Amadeo writes for TheBalance.com, the Social Security “Trust Fund” leads the way in purchasing federal bonds to facilitate the US debt.

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. 

So, the government buys its own debt instruments, which are merely promises to pay itself back with… more money facilitated... by sales of additional debt instruments or higher taxes.

Can you say “shell game”?

And since the Social Security “Trust Fund” is not anything of the sort, but, instead, a pyramid scheme whereby current purchases of U.S. Treasury notes and “retirement” payments are made on the promise of current taxpayers and returns on those Treasury notes (which aren't really assets at all), it’s not just a circle, it’s an ever-expanding debt circle drawn on the backs of unborn taxpayers.

Could a private business operate this way?

Not a chance.

But, of course, private businesses can’t force you to do business with them. They can’t put you in jail if you want to be left alone.

Only the polis can do this, and it will continue to do it, evidently, even when people who claim to be in favor of smaller government are in power.

Perhaps -- just perhaps -- that power is the problem, and ought to be reduced.

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