To whom does the US owe $14.3 trillion?

July 19, 2011

Who owns the $14.3tn debt?

US Government owes itself $4.6tn
Remaining $9.7tn owed to investors
They include banks, pension funds, individual investors, and state/local/foreign governments
China: $1.15 tn, Japan: $0.91tn, UK: $0.33tn
Deficit is annual difference between spending and revenue, $1.29tn in 2010

Source: US Treasury, May 2011 cited on BBC

America raised its debt ceiling 140 times since World War II without controversy.

2011-07-29The “Republican-controlled House of Representatives passed a stopgap bill by 218-210. Two hours later, the Democratic-controlled Senate voted to kill it by 59-41. The Senate, keen to have a deal in place before the markets open on Monday, with the potential for huge falls in share prices, is proposing a bill of its own scheduled to go to a vote on Sunday [. . .] The standoff between the Republicans and Democrats – the biggest ideological collision between the parties for decades – enters its final phase [. . .] The US stock market has just had its worst week for a year and Obama, in a Gallup poll published on Friday, saw his approval ratings drop to a new low, from 45% to 40%.” MacAskill, Ewen. 2011-07-31. “US debt crisis: Tea Party intransigence takes America to the brink.” Washington: The Observer.

2011-05 The US Treasury reported that the US Government has a debt of $14.3 trillion.

2011-04-18 “The influential credit-rating firm Standard & Poor’s which assigns ratings to guide investors on the risks involved in buying debt instruments changed its ratings of U.S. Treasury securities to “negative” from “stable” but left the overall rating as AAA. As a result the struggle intensified between President Obama’s Democratic administration and his Republican opponents in the House to get control over a nearly $1.4 trillion budget deficit and $14.27 trillion debt burden (Johnson, Steven C. 2011-04-18. “S&P threatens to cut U.S. credit rating on deficit.” New York: Reuters).” The U.S. debt cap was $14.294 trillion cap. The debt continues to rise. Probable causes include costs for health care, retirement and other so-called entitlement programs, and the interest on existing debt. The stock market response included:

The Dow Jones Industrial Average fell 140.24 points, or 1.14%, to 12201.59, its biggest decline in a month, after earlier tumbling almost 250 points. Stocks in Britain, Germany and France fell more than 2%, with most of the declines coming after the S&P news, and in early trading Tuesday, Japan shares fell 1%. Gold surged to just below $1,500 an ounce.

Source: U.S. Warned on Debt Load

2011-01 A U.S. congressional report entitled “The Financial Crisis Inquiry Report 2011-01” blamed ratings companies such as S&P and Moody’s Corp for triggering the financial crisis when they cut the inflated ratings they had applied to complex mortgage-backed securities. “Moody’s, the
Commission’s case study in this area, relied on lawed and outdated models to issue erroneous ratings on mortgage-related securities, failed to perform meaningful due diligence on the assets underlying the securities, and continued to rely on those models even after it became obvious that the models were wrong (FCIR 2011:126).” The Commission investigated institutions included American International Group (AIG), Bear Stearns, Citigroup, Countrywide Financial, Fannie Mae, Goldman Sachs, Lehman Brothers, Merrill Lynch, Moody’s, and Wachovia. “26 million Americans who are out of work, cannot ind full-time work, or have given up looking for work. About four million families have lost their homes to foreclosure and another four and a half million have slipped into the foreclosure process or are seriously behind on their mortgage payments. Nearly 11 trillion in household wealth has vanished, with retirement accounts and life savings swept away.” “The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public (The Financial Crisis Inquiry Report 2011-01:xvii).”

2009-05 The National Commission on the Causes of the Financial and Economic Crisis in the United States was established as part of the Fraud Enforcement and Recovery Act (Public Law 111-21.) passed by Congress and signed by the President. This independent, 10-member panel was composed of private citizens with experience in areas such as housing, economics, inance, market regulation, banking, and consumer protection. Six members of the Commission were appointed by the Democratic leadership of Congress and four members by the Republican leadership.

2008-09/10 Fed Chairman Ben Bernanke told the FCIC, “As a scholar of the Great Depression, I honestly believe that September and October of 2008 was the worst financial crisis in global history, including the Great Depression. If you look at the firms that came under pressure in that period . . . only one . . . was not at serious risk of failure. . . . So out of maybe the 13, 13 of the most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two (The Financial Crisis Inquiry Report 2011-01:354).”

2008-09 An extra digit was added to the US federal debt clock when the debt exceeded $10 trillion (Durst). The deficit problem intensified since the 2008 financial crisis.

2003-2007 Between “2003 and 2007, as house prices rose 27% nationally and $4 trillion in mortgage-backed securities were created, Wall Street issued nearly $799 billion in CDOs that included mortgage-backed securities as collateral. Collateralized debt obligations (CDOs), structured financial instruments that purchase and pool financial assets such as the riskier tranches of various mortgage-backed securities, came into existence in the first decade of this century […] The key players involved in the creation, management and sales of CDOs were Securities firms, CDO managers, rating agencies, investors, and financial guarantors who took risks but made huge profits […] CDO managers and investors are derivative folks not mortgage professionals or real estate professionals (The Financial Crisis Inquiry Report 2011-01:128).

2007 From 1978 to 2007, “the amount of debt held by the inancial sector soared from $3 trillion to $36 trillion, more than doubling as a share of gross domestic product. The very nature of many Wall Street irms changed—from relatively staid private partnerships to publicly traded corporations taking greater and more diverse kinds of risks (The Financial Crisis Inquiry Report 2011-01).” “Money washed through the economy like water rushing through a broken dam. Low interest rates and then foreign capital helped fuel the boom. Construction workers, landscape architects, real estate agents, loan brokers, and appraisers proited on Main Street, while investment bankers and traders on Wall Street moved even higher on the American earnings pyramid and the share prices of the most aggressive inancial service irms reached all-time highs. Homeowners pulled cash out of their homes to send their kids to college, pay medical bills, install designer kitchens with granite counters, take vacations, or launch new businesses. They also paid off credit
cards, even as personal debt rose nationally. Survey evidence shows that about 5% of homeowners pulled out cash to buy a vehicle and over 40% spent the cash on a catchall category including tax payments, clothing, gifts, and living expenses. Renters used new forms of loans to buy homes and to move to suburban subdivisions, erecting swing sets in their backyards and enrolling their children in local schools (The Financial Crisis Inquiry Report 2011-01:5).” . Overall mortgage indebtedness in the United States climbed from $5.3 trillion in 2001 to $10.5 trillion in 2007. The mortgage debt of American households rose almost as much in the six years from 2001 to 2007 as it had over the course of the country’s more than -year history. The amount of mortgage debt per household rose from $91,500 in 2001 to $149,500 in 2007 (The Financial Crisis Inquiry Report 2011-01:6).”

2006 Home sales volume started to increase, and average home prices nationwide climbed, rising 67% in eight years by one measure and hitting a national high of $227,100 in early 2006. (The Financial Crisis Inquiry Report 2011-01:5).”

2006 On the eve of the crisis in 2006, financial sector proits constituted 27% of all corporate proits in the United States, up from 15% in 1980 (The Financial Crisis Inquiry Report 2011-01: xvii).”

2005 Paul McCulley, a managing director at PIMCO, one of the nation’s largest money management firms, told the Commission that he and his colleagues began to get worried about “serious signs of bubbles”. They therefore sent out credit analysts to 20 cities to do what he called “old-fashioned shoe-leather research,” talking to real estate brokers, mortgage brokers, and local investors about the housing and mortgage markets. They witnessed what he called “the outright degradation of underwriting standards,” McCulley asserted, and they shared what they had learned when they got back home to the company’s Newport Beach, California, headquarters. “And when our group came back, they reported what they saw, and we adjusted our risk accordingly,” McCulley told the Commission. The company “severely limited” its participation in risky mortgage securities (The Financial Crisis Inquiry Report 2011-01: 4).”

2005 Convinced that we lived in a less risky world former Federal Reserve governor and National Economic Council director under President George W. Bush Lawrence Lindsey encouraged any rational investor to respond to a less risky world by laying on more risk. The US played with an asymmetric policy that allowed for unfettered, unregulated markets and mortgages and unrestrained growth. If there was a glitch the Treasurer cushioned the impact. (The Financial Crisis Inquiry Report 2011-01: 133).” suggested this could be a “moral hazard.”: “Did the policy encourage investors and financial institutions to gamble because their upside was unlimited while the full power and inluence of the Fed protected their downside (at least against catastrophic losses)? Greenspan himself warned about this in a 2005 speech, noting that higher asset prices were “in part the indirect result of investors accepting lower compensation for risk” and cautioning that “newly abundant liquidity can readily disappear.” Yet the only real action would be an upward march of the federal funds rate that had begun in the summer of 2004, although, as he pointed out in the same 2005 speech, this had little effect. And the markets were undeterred (The Financial Crisis Inquiry Report 2011-01: 133).”

2004 Synthetic CDOs, such as Goldman Sachs’s Abacus 2004-1 deal, were complex paper transactions involving credit default swaps (The Financial Crisis Inquiry Report 2011-01:144).”

2004 A new debt clock was installed at West 44th Street and Avenue of the Americas (Durst).

2000-2003 The Federal Reserve cut interest rates early in the new century and mortgage rates fell, home refinancing surged, climbing from $460 billion in 2000 to $2.8 trillion in 2003, allowing people to withdraw equity built up over previous decades and to consume more, despite stagnant wages (The Financial Crisis Inquiry Report 2011-01: 4).”

2002The debt clock was switched back on (Durst).

2000 During the 1990s the US prospered, the US national debt slowly decreased. The debt clock was temporarily switched off in 2000 (Durst).

1989-02-20 The US national debt was c. $3 trillion. Seymour Durst conceived and installed the first National Debt Clock to call attention to the soaring debt and each family’s share of it. The original Durst clock was installed on Sixth Avenue and 42nd Street(Durst).

1980s Federal Reserve chairman Alan Greenspan championed deregulation and reliance on self-regulation by financial institutions. Deregulation was argued by Greenspan to raise the level of competitiveness, increase productivity and efficiency and therefore lower prices. For 30 years until the crash in 2007, deregulation was supported by successive administrations and Congresses, and actively pushed by the powerful inancial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe. This approach had opened up gaps in oversight of critical areas with trillions of dollars at risk, such as the shadow banking system and over-the-counter derivatives markets. In addition, the government permitted inancial irms to pick their preferred regulators in what became a race to the weakest supervisor (The Financial Crisis Inquiry Report 2011-01: xvii).” “Between 1978 and 1980, Congress and President Carter approved deregulation of airlines, trucking, and railroads. Carter aide Mary Schuman played a crucial role in bringing about airline deregulation. For all the market talk that surrounded transportation politics before and after 1980, however, officials of the American state had been and remained the principal agents creating those markets (Rose et al. 2006.)”

1971 The first comprehensive proposal to deregulate a major industry in the United States, transportation, originated in the Richard Nixon Administration and was forwarded to Congress.

1970s Deregulation gained momentum, influenced by research at the University of Chicago and the theories of Ludwig von Mises, Friedrich von Hayek, and Milton Friedman, among others. Presidents Nixon, Ford, and Carter sought to deregulate transportation with a view toward reversing “stagflation.” (Rose et al. 2006.)

1960s President Johnson sought broad deregulation of rail, truck, and airline firms. Johnson wanted another device to “fine tune” the economy. (Rose, Mark H. Bruce E. Seely, and Paul F. Barrett. 2006. Railroads, Trucks, Airlines, and American Public Policy in the Twentieth Century.)

1917 The US Congress enacted a debt ceiling.

Webliography and Bibligraphy

Angelides, Phil; et al. 2011-01. The Financial Crisis Inquiry Report” Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. Official Government Edition. The Financial Crisis Inquiry Commission. Pursuant to Public Law 111-21.

Rose, Mark H. Bruce E. Seely, and Paul F. Barrett. 2006. Railroads, Trucks, Airlines, and American Public Policy in the Twentieth Century.

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