The Federal Reserve Is Our Largest Creditor, Not China

The GAO is out with their latest audit of the public debt and the good news is that it presents fairly in all material respects. The bad news is that it's jam-packed with far too many zeros than should ever be included in a public debt report.

Here's my question: how much of this includes debt owed to our own Federal Reserve? Says the GAO about public debt:

Federal debt managed by BPD consists of Treasury securities held by the public and by certain federal government accounts, referred to as intragovernmental debt holdings. Debt held by the public primarily represents the amount the federal government has borrowed to finance cumulative cash deficits. Intragovernmental debt holdings represent balances of Treasury securities held by federal government accounts, primarily federal trust funds, that typically have an obligation to invest their excess annual receipts (including interest earnings) over disbursements in federal securities.

Nowhere in there do I see anything about the Treasury securities purchased by the Fed from banks which we, the taxpayer, are liable to the Fed for (remember, principal PLUS interest, kiddies) but I doubt they'd be so kind as to break that down for the unwashed masses since they are already trying to make it confusing by putting $13,551 into billions of dollars ($13,551,000,000,000). But that's fine, JDA knows where to find the other number. Hold tight. Apparently the numbers are correct but let us also keep in mind that the government does not use GAAP and therefore these numbers are barely a step up from being totally made up.

In GAO’s opinion, BPD’s Schedules of Federal Debt for fiscal years 2010 and 2009 were fairly presented in all material respects, and BPD maintained effective internal control over financial reporting relevant to the Schedule of Federal Debt as of September 30, 2010. GAO’s tests of BPD’s compliance with the statutory debt limit for fiscal year 2010 disclosed no instances of reportable noncompliance.

As of September 30, 2010 and 2009, federal debt managed by BPD totaled about $13,551 billion and $11,898 billion, respectively. Total gross federal debt outstanding increased over each of the last four fiscal years.

Now, back to that debt. $13,551,000,000,000 is what we owe in total to whomever, be that China or "Caribbean Banking Centers". To see to whom we owe what, the Treasury publishes this helpful little chart.

 As you can see by the chart, China is still the largest foreign holder of US Treasurys according to the Treasury. What you wouldn't know, by looking at the chart, is that an even larger holder of Treasurys (therefore, creditor of the United States) is, in fact, the Federal Reserve. That's right, China is not our biggest creditor, it's the Fed.

Because I know those zeros can make it confusing (and likely on purpose since few among us are actually mathletes), let's translate that. The Fed holds $839,000,000,000 in Treasurys, meaning they have surpassed China as #1. Fantastic, ain't it? Don't be dumb and think owing them is any different from owing China, it's all a hostile foreign body as far as I am concerned.

Add $600 billion (QE 2) to that number and China's proclivity towards slyly dumping Treasurys and it's very likely that the Fed could beat our second largest creditor by twice as much once all's said and done.

And hey, don't let anyone tell you the Fed isn't printing money. According to their latest balance sheet release, they're printing it at a rate of $3,385,000,000 a week (or $49,677,000,000 for the year). Surely that doesn't affect their price stability mandate.

Recommended supplementary reading: Who Owes What, and To Whom? Public Debt, Ricardian Equivalence, and Govermmemtal Form by Richard E. Wagner

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


elf2006real said...

Is there one conspiracy theory that won't come true?


W.C. Varones said...

National debt problem solved.

Section 1 of the End the Fed Act of 2012:

All U.S. Treasury obligations held by the Federal Reserve are declared null and void.

And good luck collecting on the Fannie Mae debt.

Graybeard said...

Since they don't follow GAAP, and they don't make much of what they do known, how do we know this?

How do we know it's not much worse?

Personally, I have hard time believing there's a "Caribbean Banking Center" that can buy that much debt. Most of the area is not exactly wealthy. I'm guessing it's a ruse and it's really the Fed in disguise. Or in drag.


Excellent question. Why do you know that the dollar in your wallet is worth a dollar? Faith. Same with this I suppose.

As for the Caribbean Banking Centers, I asked the same thing earlier this year.