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Foreign + Banks + Wealthy = Not Quite Overwhelming
(But Still More than Half)

On yesterday’s post I got a comment indicating that most government debt is actually held by US workers in their 401k’s.  Clearly that was not my understanding, so I went digging.

And after I dug, I went to Excel.

And after I went to Excel, I went to PivotCharts.

The results are pictured above.

“Overwhelming” was Too Strong a Word.  “Majority” is Better.

OK, so foreign holdings + bank holdings = about 45% in the chart above.

But then we have these, which account for 25%:

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25% Falls Into These Two Categories

Of that 25%, what is owned by the wealthy?

I’m pretty sure it’s more than half, as the wealthiest 1% own more than half the stocks in the US, but I haven’t found good numbers on Treasury (government debt) holdings.  If someone has that please let me know.

Anyway if it’s about half, we’re looking at 57% total ownership by Foreign + Banks + Wealthy Individuals.

Am I Upset at the Wealthy?

No, not at all.  Nothing wrong with being wealthy – I aim to be one of them someday Smile

But it certainly isn’t smart for the rest of us to be paying so much interest to them, to banks, and to foreign countries.

Being in debt just isn’t smart – and not because of the debt itself, but because the interest payments pile up and drown you.

So if “austerity” means “reduce the debt,” fantastic.  I’m all for it.

But if it means “stick the average citizen with the bill while continually funneling interest payments elsewhere,” I am opposed.  Sorry Right Wingers.

I also think it’s stupid to just ignore the debt and say “austerity is bad.”  Sorry Left Wingers.

I bet there are more than two options here.  Someone smarter than me will have to propose alternatives.  But I’m pretty sure the two “options” being argued over are, as usual, a false dichotomy – we lose either way.

This is Just Weird

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That Our Government Holds 30% of its Own Debt is Kinda Good News I Guess,
But it Also Indicates Some Serious “Creative” Accounting Going On

The Workbook

The workbook for this post is available here.

Rob Collie

One of the original engineering leaders behind Power BI and Power Pivot during his 14-year career at Microsoft, Rob Collie founded a consulting company in 2013 that is 100% devoted to “the new way forward” made possible by Power BI and its related technologies. Since 2013, PowerPivotPro has rapidly grown to become the leading firm in the industry, pioneering an agile, results-first methodology never before seen in the Business Intelligence space. A sought-after public speaker and author of the #1-selling Power BI book, Rob and his team would like to help you revolutionize your business and your career.

This Post Has 29 Comments
  1. The US Congress has routinely passed paper (debt) into the social security system in exchange for cash. It is good that that debt is not held by foreign governments (I guess), but not good for SS because the interest rates are puny and are “robbing Peter to pay Paul”.

    I still don’t understand your point of view on retirement accounts. 401k and IRA contributions have always been deposit limited, so the “very wealthy” can’t dump a lot of money in there. Also of note, government bonds are usually held by people at or near retirement age because they are low risk. My guess would be that your retirement bar is NOT highly held by “very wealthy”, whatever you mean by that.

    1. In the workbook you’ll see that “Retirement” is “Pensions” and “Mutual Funds.” It does not specifically single out 401k’s or IRA’s at all. You still have a point of course – pensions are majority non-wealthy. Mutual funds are majority wealthy.

      The “Mixed” category is all “Savings Bond Investors” – which is very hard to tell wealthy vs. non wealthy. We need more data.

      In the end though the “swing” will just be a few percent right? Either way we’re funneling half or more than half of interest payments to places that aren’t Joe Taxpayer or Joe Low Income.

      1. We might still be surprised to see how much of that debt is in the hands of “average” folks. Mutual funds are much more attractive to people with less than a few million dollars to invest. Once you get into tens of millions you can likely do better investing in individual stocks, small businesses, commodities, real estate, etc. Government bonds would be part of the mix, but not a large part because the returns are so low. It would be great to see actual numbers.

        Still, the real question is about servicing the debt, not who holds it. We all know that rates will go back up. What are we doing to prepare ourselves to pay off debt when it is too expensive to refinance it?

        1. Anyone who so gracefully uses the phrase “service the debt” definitely “gets it” IMO. In a house fire, it’s the smoke that kills you. Debt is the fire, but debt service (interest) is the smoke.

  2. In order to lower interest payments you must pay off debt. Obviously, the first step to paying it off is to stop incurring it, which means not spending more than you take in. Then, to actually pay down debt, the treasury would need to take in MORE than the Congress spends. So, even a balanced budget short-term would eventually lead to serious problems when interest rates rise. The goal of a real austerity program would be to reduce debt. Since we have likely reached the point where we cannot generate more income by raising tax rates (see this interesting youtube video http://ow.ly/knY5y), reducing current spending is probably the only source of funds that could be used to reduce debt.

    The news gets worse; our economy is so fragile that reductions in spending that would simply balance the federal budget could cause some painful side effects. Nobody in Congress has the guts to do the right thing, and even if they did they’d be replaced at the next election with someone who would “bring home the pork”. I really don’t see anything in the current climate that would spur either party to make any meaningful changes. Can you think of anything that might change the situation? There must be at least one magic PowerPivot up your sleeve!

    1. You can also default on debt, or partially default by forcing creditors to take haircuts. Such moves come with their own sometimes drastic consequences of course, but for completeness’ sake we must see all options.

      I once read that “all debts are eventually paid, either by the borrower (via payoff) or by the lender (via default).” I found that very crystallizing.

      There is, of course, a third flavor of payoff, which is “force someone else to pay it off.” Inflation is a sneaky way to do that – if suddenly everyone in the US made 10x as much in salary as they do today, but prices on everything we buy also went up 10x, we’d be “even” in terms of lifestyle. And since tax revenues would also go up 10x, suddenly the deficit and debt would look 10x smaller, much easier to pay off! Magic!

      BUT that is, of course, a partial default – the lender receives 1/10 the buying power that they expected in return for their original loan. The lender gets hosed.

      AND anyone with money in their savings account also got robbed, because that money is now worth 1/10 as much. So in essence, the lender AND the savers are the ones paying off the debt via inflation.

      1. Ouch! Defaulting is bankruptcy, which often requires a liquidation of assets (imagine China owning Yosemite) or a “reorganization” (very strict terms imposed by a judge) in order to cancel the debt. Inflation might seem magical (hey, it worked out for mortgagees in the 1970’s, right?), but countries don’t live in a vacuum. Devaluing our currency by 90% would lead to indexing of the debt (then foreigners could be repaid more than domestic debt holders), not to mention a real decrease in purchasing power when buying anything from overseas, which is almost everything except real property, locally-grown foods and domestic labor at this point.

        This is such a fun discussion. I’m sorry I missed Steven Levitt and the rest of PASS BACON 🙁

        1. Liquidation of assets is what happens when you or I default – it’s clear which court has jurisdiction over us and it’s clear our police will be called in to enforce the ruling if we resist.

          But when a nation defaults, no international court holds jurisdiction, and there is no police force available to enforce liquidation. Generally speaking nothing happens to that country other than people stop loaning it money. And generally even THAT is short-lived.

          The Chinese would not end up with Yosemite unless they were willing to invade the most militaristic country on the planet 🙂

          The real implication for us, as you suggest, is that our currency would drastically lose purchasing power on the world stage. And American consumer culture would find itself in a very rough place.

        2. Yeah inflating your way out of debt has real negative repercussions for the economy as does devaluations. It’s a short term fix that trades greater employment for less wealth aka anyone who has saved in the past gets burnt. I still think it is arguable that rates will rise or at least how fast they will rise. And I am still waiting for the inflation prediction to come true. I think u rightly point out that there is also a big danger from austerity that could arguable increase deficits given the increase in non discr spending that would result (as well as lower tax revenues).

          1. Greg the inflation thing isn’t MY way at all. I’m not a fan of it, just saying that’s one way govts often sneak out of the noose.

            But I disagree that inflation isn’t happening. The US gov continually tweaks the CPI formula to exclude “disfavorable” things like food and energy, but leaves in things like housing, which is falling (but only matters if you are getting a new mortgage right now). I love Shadowstats.com for stuff like this.

            Furthermore, US inflation is lower than it “should” be precisely because we are the issuer of the world’s reserve currency. When we issue new “liquidity” (aka print more money), the world shares the inflation consequences with us while only we reap the benefits. No other country currently has that “privilege.”

          2. I know I was agreeing with you that is has negative consequences. Core CPI has always excluded energy and housing to my knowledge and has erroneously factored in quality improvements to lower the figure. I also agree that being the worlds currency issuer has allowed the usa to conduct an unsustainable policy that countries could not. However my point is that there still is a ton of slack in the economy and the massive inflation that was predicted to result from monetary policy just has not happened. If anything due to the sequester we could see a contraction, massive inflation is not on the horizon right now.

  3. I have to say, this is one case where a pie chart would have been much better; especially where you switch over to cumulative percentage of multiple categories combined. I really struggled with that concept from your bar chart.

  4. Debt is not in itself bad. It depends on what the debt is used for. Debt used to pay for a useful education or a house that one can afford is fine. Debt used to help fund an investment can also make sense. If debt provides a means to achieve goods (aka hospitals and highways) then it is irrelevant that the interest goes to the wealthy. It’s payment for services received. The wealthy always could put the money somewhere else.

    I would also say that debt owned by the government is not magical accounting. It results from the USA being a currency issuer (rather than a user like Greece). The fed creates money by buying US debt. This also means that the US government cannot go bankrupt or default although it can create inflation with too much money supply (although this has not happened to date) and soft default.

    The idea that reducing debt is a right wing idea is not historically fair (see Reagan or Bush2). The right has accumulated debt as well. It is more fair to say the right is obsessed with tax cuts while the left is obsessed with spending. Neither side has a great record on the issue.

    What is more, while the most recent incarnation of the right calls to reduce debt they do not propose any realistic solutions. They focus on non defense discretionary spending, which as a percentage of GNP is already at an all time low since the 60s. They don’t touch non discretionary spending (aka Medicare, Medicare, or SS) and forget about defense). These non discretionary programs are funded as a matter of existing law not via some active choice the president or congress has made.

    In fact the greatest portion of current deficits can be attributed to drops in tax revenues and the increase in non discretionary spending that automatically accompanied the GFS. After that the next greatest causes are two wars and the bush tax cuts.

    Many would argue that given where the US economy is, the current fiscal situation is already too austere . Cutting short term spending in a low interest rate environment (why do we need interest rates to be even lower?) during a recession may result in further contraction and an even larger defecit. The is especially true when there are existing roi positive intiatives for the government in infrastructure.

    I’m not advocating for a massive increase in government – the responsible path is short term stimulus with reform in the longer term to reign in costs ( Medicare, SS, military).

    Over the long term I agree with the overall point of your post. Interest on interest is death from a million cuts. Debt should be tied to longer term investments (like highways) and paid off by taxpayers over the life of the asset. Spending on short term consumption should be covered by taxes. Imo there does need to be some flex for the economic cycle. Calling for austerity in a near zero interest rate environment seems irresponsible.

    1. Agreed on many counts. But I see close to zero sign that we are investing our stimulus in productive infrastructure. Krugman’s equations are all about GDP, which increases even if we pay people to go chop down national forests and leave the wood to rot.

      All we hear about is generic stimulus – some faceless vague concept with no details. Where’s the Grand Plan to revitalize America? Anything sufficiently effective would also feel quite drastic and specific. Honestly I think no one has real ideas. So at the moment, we are merely accumulating unproductive debt. You used the word “irresponsible” and I think it applies here too.

      And guess who all of our stimulus programs are disproportionately benefiting? The most wealthy. Quantitative Easing etc. primarily benefits the first hands to get the new money, which is Wall Street. It’s weird, to me, that the Left does not notice this. Wall Street positively loves stimulus. But Wall Street is not the economy, and Wall Street is not the people the Left are supposed to defend.

      Also, I agree that the Right is lousy about debt. Absolutely lousy. They just TALK like they want it reduced. At least the Left is honest about their intentions and actions. But I still think their plans are counterproductive, at least from what I see today.

      Our status as issuer of the world’s reserve currency gives us advantages no other country has, and yes, we abuse that power. I still think the US gov owing itself is a bad sign – a reflection that our unfunded liabilities are many times greater than our official debt.

  5. Well I think we need to separate monetary policy from fiscal. In agree QE helps the wealthy it also has been largely ineffective. That is becuase the USA largely has a privatized monetary system. If the private banks don’t lend out the money then it has little impact. This appears to be what has happened, lower rates and fed asset purchases have not trickled down to more lending until very recently.

    On the fiscal side, most of the spending has been the result of automatic stabilizers with less tax revenues coming in and more social spending going out. Given the political climate right now, it’s hard to see any governemt having the ability to have a grand spending plan that would really stimulate. Especially when one side only take about tax cuts and discretionary spending (which is already low) and uses the debt ceiling as a hostage.

    I am not a fan of the left but right now it seems like a fight between the moderate right and extreme right, and the result is nothing gets done. Interesting threads btw.

  6. From what I understand, the US owes the federal reserve about $2 trillion which can just be defaulted without major consequences. Of course, all this is pretty complicated to me. All I know is that if you spend less than you bring in, you are doing good.

  7. I agree with Greg. It makes no sense to not borrow against the 1% interest rate. And do as much of it as possible. Extremely cheap fixed debt (Which 1% US Govt Bonds are) is not a burden at all, but rather the opportunity of a lifetime. The common misconception is that we risk inflation. Uhh the interest rate is 1%!!! If that were even a remote possibility then the interest rate would not be at historic lows. The only thing we are at a very serious risk of is deflation. Deflation causes “Lost Decades” and “Great Depressions”. Let’s just call it a “Euthanized economy” this time. Inflation causes interest rate increases on our checking accounts. We have almost nothing left to fight off deflation, but our inflation arsenal is another story. We just may never get to use it.

    The “funny” accounting is coming directly from our financial institutions by ignoring Mark to Market. Until that is restored, the banks should not be publicly traded nor privately controlled for that matter. The Fed is having to pay back their wonderful MBSs while politics want to blame poor people for not doing the only function the banks perform, which is policing whom they loan money (Besides ATM maintenance). SubPrime was less than 3% of the conventional loan market (If I remember right). If 100% of SubPrime defaulted (and nowhere near 100% did) then the banks should still have been somewhat functional if not quite profitable. Poor people did not invent credit default swaps or aka the “Economic weapons of mass destruction” (name given by Warren Buffet). Phil Graham did (John McCain’s 2008 economic advisor).

    Meaningful stimulus was attempted. We gave over 700 billion to the banks at the end of 2008 so they could just buy gov’t bonds, tighten liquidity, and increase credit card rates to 30%. Remember? The other stimulus had plans for high speed rail and and a national fiber internet, but since those weren’t things that would only help the wealthiest of people and stifle free market competition, this did not sit well with a certain party that represents our country’s biggest welfare states. Also the same party that has no problem paying for Iraqi’s universal healthcare, but has no interest in having everyone contribute to their medicare. Go figure.

    Sorry if this comes off as political. It is just slightly frustrating for some of us younger folks that have spent almost all of our careers in such severe economic times.

    TLDR
    Any of us individually would love to take on trillions in loans at a fixed 1%. I cant see how that is unaffordable to anyone on earth.

    .

    1. Niraj I think I agree with you a lot more than you suspect. We have given a lot more than 700 billion to the banks. A lot more. And it continues every day. I don’t think this is a partisan issue though – the Right claims to want to reduce debt (but then blows up spending). The Left claims to represent the little guy, but then forks over just as much money to the banks as the Right did. Neither side truly sticks to their platform when the chips are down. Outright bailouts are only part of the story – QE and POMO are both massive ongoing handouts to the wealthy, and they both have the approval of our sitting Pres. But we don’t call them bailouts, cuz that’s distasteful.

      You want stimulus? Why not funnel those funds directly into the hands of the citizens? A trillion dollars is about $3k per person in the US. Why are those funds not being handed to us? Liquidity and GDP both go up directly then, just as we hope they do with bank stimulus. Yes it causes inflation, but isn’t that the point? Money sitting in bank vaults going nowhere does not achieve its desired stimulus effect.

      Or why not forgive all of those student loans saddling your generation? So many places to inject money, but we never choose the little guy. I think that’s telling. Fundamentally, all stimulus is cheating, in a sense, but when we cheat on behalf of large institutions we can cloak it in fancier language.

      I bought my first house in 1999, then refinanced multiple times, then bought another house in 2006 and another in 2007 and then my last house in 2010 (I moved each time – I didn’t keep them). So I have a great sampling of what happened with mortgage lending. I can tell you that the lending standards became INCREDIBLY LOOSE starting in the early 2000’s. In 1999 my finances were placed under intense scrutiny – many iterations of providing documentation, it stopped just short of blood tests and fingerprinting 🙂

      At some point though all I had to do was state my income (no proof required) then show up and sign the docs! Loans became incredibly easy to get. And that is the reason why house prices went up so sharply. My 1999 house bought for $288k sold for exactly double in 2006, largely because loans were available in larger ratios to incomes than in 1999. In 2010 it was back to blood tests and fingerprints.

      Far more than 3% of mortgage loans, in my experience, were “unsound” loans. But rather than hold the banks responsible for their loose lending, we bailed them out. Guess what though, all those profits and bonuses paid to bankers during the loose years? They were not clawed back were they? Private the gains, socialize the losses. The name of the game – as long as our leaders let them get away with it, why not? I’d probably do the same in their (the banks’) shoes.

      Same thing with college tuition. Same game, new domain. My Vanderbilt tuition, in 1992, was $16,500. (I was on 95% scholarship and didn’t pay most of that – we couldn’t have afforded it). Vanderbilt tuition is now $42k. Is the education nearly 3x as valuable as before? No. Have we experienced cumulative 300% inflation in the US since then? No. The reason tuition is so damned expensive now is the same reason why houses “appreciated” so dramatically in the early 2000s – loans have become far more plentiful due to looser standards. They lend you much more money than you could ever pay back. This is even a better scam than the housing scam, since the young has less political clout AND student loans are much harder to discharge in bankruptcy than mortgages. So they own you and will milk you like cows for the rest of your lives unless something changes. What a terrible situation – I hope you have escaped that burden but most recent grads have not.

      One last factor in all of this: the interest rate in the US is not set by the market. It’s set by command of Ben Bernanke (and previously held near zero by Greenspan). That free money – free loans – is primarily made available to the bigger banks, not just the US Treasury. The banks would be fools not to take it, as you say it would be GREAT if you and I could also get direct 0% loans from the Fed. But then the banks need to find “takers” for that money in the form of loans, so the banks can turn a profit on the spread. See how this comes full circle? Near-zero interest incents/tempts/drives the banks to loosen lending standards – to blow massive bubbles in other words. First in housing, now in student debt. Stock market too IMO.

      Everything has consequences, and the biggest and most powerful forces in the country always seem to come out ahead. If Obama truly represents the folks he claims to, then he’s an epic failure. I hoped for more from him, and we can’t just blame the opposition. When he takes the podium for the state of the union, why not come clean to the American people and tell them that they’ve been scammed? He has nothing to lose now right? Second term. Until we hear someone that honest, we don’t have real leaders.

      1. All good points but I would suggest that when we are talking about stimulus, just handing 3k checks or forgiving debt may not do much to increase spending. The 3k check is really like a tax cut. The best stimulus would have the best employment multiplier effect and have a positive or even high ROI. Infrastructure, Rnd, education.

        I think on the finance side OBs biggest crime is being too pragmatic. The bailouts and QE kept the system from imploding. Things could have looked a ton worse without these actions. The biggest danger is we just rince and repeat. With so much money out here the dangers of cheap credit will resurface.

        And I have to agree with PPP, cheap interests rates and massive debt have their risk. They def played a role in the housing bubble and education bubble. But it can be over simplified to blame cheap credit. Bad regulation, the disappearance of the walls between investment banking and regular banking, poor fed policy regarding LOLR lending and the arrival of securitization all combined to introduce systematic risk that would be dangerous in any interest rate environment. Combine that with the lack of consequences for the TBTF financial institutions and its a real recipe for disaster.

        I think OB has governed from the centre right, so I agree that he is not the uber liberal many have wished he would be. But I think that is a lot diff than holding the political process hostage over the debt ceiling all while really not providing any solution. I apologize for being overly political here but I would say in summary that the debt issue is not attributable to OB, I would not want to see a faster contraction anyway, taxes should go down and spending should go up when in a low interest rate recessionary Econ, and the Rs just don’t seem to have a plan (or least one that would not hurt the Econ). I have to agree that OB has been way to soft on the banks (although I don’t think either side has a good record here).

        And yes power pivot rocks. I am most of the time a collateral auditor (I mange a consulting practice around this service). PP has allowed me to blow my old excel analysis away. What’s more it has gotten me to really understand data. I am now able to speak about BI and data as a producer and business analyst. It may have been a huge part of the reason I got offered a new CFO job.

  8. Thanks, PPP. You are always able to keep your cool. You are dead on about how unfairly liquidity is funneled through the system.

    On a brighter note, I began using PowerPivot exactly 1 year and 4 months to the day. I probably check your site 5 times a day for some inexplicable reason (I know you do not update it 25 times a week!), and I was able to bring a level of reporting that my company had never imagined. My stuff runs entire an entire division now, and IT was never able to recreate it using the Multi dimensional model in SQL Server 2008. And don’t even get me started on how much faster I could create a solution. The post you did with same store sales was the moment I realized that PowerPivot was the game changer I have been waiting for at a price I could afford. To make a long story short, it has enabled me to increase my salary almost 50% in that time. And before you wrote your book (Which I bought in paperback and electronic format), I had learned how to use it entirely from reading this site. What you are doing here, has a meaningful impact in people’s lives. Big thanks from me and my current company, and the 2 gigantic corporations that I do consulting for.

    1. That’s awesome Niraj! Would you mind dropping me an email and explaining how you increased your salary? I get asked that question a lot by other Excel pros – as they expand their powers they wonder how to get fair market value for their skills.

      1. I will send to rob at a place called pivotstream with a dot and a com. This is a question I once struggled with as well.

        1. I sent you an email directly, but note that I am no longer at my old job. My email address is rob. At a place called PowerPivotPro. Dot com.

    1. Until our creditors have even one-fifth the military might as the US, I think Alaska is staying put. So to speak.

      For us the risks are unique – the risk that our currency will not be accepted for foreign goods, particularly oil, is front and center in the scenario of a US debt default. We are particularly vulnerable there, and very few people understand just HOW vulnerable we are in that regard, but our physical assets won’t be sold off.

      1. I don’t mean to go political, but I have little trust that our Congress wouldn’t be willing to offer up our national “assets” to the highest bidder in order to avoid default.

        Also, that there is no jurisdiction under which such a default could be adjudicated *today*, that does not mean there won’t be in the very near future. The borrower is always servant to the lender and, again, our current government seem to be proponents of subjugating U.S. sovereignty to international laws and courts. Ask anyone in the Euro zone if debt threatens sovereignty.

        I sound like gloom and doom, I know. Perhaps I’ve been staring at the debt clock for too many years, but it only ever seems to go faster, never slower, never even close to stopping. How will it ever reverse?

        1. Yeah if Congress can further their political careers by selling us out, they will, no doubt. But selling us out *visibly* tends to be political suicide. It would be hard for any voters to “get behind” the idea of giving Alaska to China. Or Yosemite. There’s really no way to smokescreen that one.

          Much better to sell us out in ways that the voters don’t understand or even see. Example: do you know that the Federal Reserve, issuer of our currency, is a private enterprise run by the biggest banks? Furthermore it has complete secrecy – it does NOT have to disclose its “books” to Congress or the public. So they can give our money to anyone they want – foreign governments, foreign banks, etc. – and the US taxpayers never get to know. Allowing that to continue is one great way Congress can sell us out in favor of foreign interests, and no one has any clue the heist is even going down.

          In Greece, Cyprus, Ireland, etc. we’ve seen examples of this – complex sellouts no problem. Plainly obvious sellouts get beaten back.

          Yeah there is no way the debt ever gets paid back. Too huge. It would require 100% income taxes for more than a year to pay it off! So this ends in default. Whether that’s an inflationary default or an outright default remains to be seen, but those creditors are not getting their money. Of course, the dollar’s buying power collapses in both cases, and our politicians will find a scapegoat for why gas suddenly costs $500 a gallon or more. The real dynamics behind all of this will not be unmasked to the public.

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