Niall Ferguson had a big weekend. His article on the United States’ propensity to go into debt gets published in the New York Times Magazine. He compares the US economy to a dinosaur named debtlodocus and still gets paid (I would presume) to spend the weekend in the French riveria talking about big themes. And his latest book impressed the well-known optimist over at Morgan Stanley.
Ferguson’s New York Times article quotes an unnamed analysts who does a nice little bit of extrapolation :
One analyst has half-seriously calculated that at the current rate of foreign accumulation, the last U.S. Treasury held by an American will be purchased by the People's Bank of China on Feb. 9, 2012.
I wish I had thought of that line. It isn’t hard to figure out how the analyst made the projection. Well over 50% of all Treasuries in private hands are now held abroad – see p. 14 of this Treasury presentation. To figure out when US holdings of US Treasuries disappear, pick your trend line and plot it out.
Actually, I suspect that if foreign demand for US Treasuries is that strong, the US will have no trouble creating enough new Treasury bonds to assure that at least a few remain in private U.S. hands. As Ferguson shows, the US does have a comparative advantage at creating and markeing debt.
But there is no doubt that financing big, ongoing current account deficits – deficits that aren’t going away anytime soon – implies that a rising share of US debt will be held abroad. And, over time, as the Chinese, Russians and Saudis get a bit more sophisticated with their investment portfolio, a rising share of all US assets -- not just US Treasuries -- will be held abroad. That is what happens if a country outsources savings and relies on foreign savings to finance its domestic investment. Foreigners want a cut.
The Treasury presentation also illustrates – graphically – another point made by Ferguson. A decent chunk of US Treasury debt is quite short-term. Over 50% matures in the next two years – see p. 9 of the Treasury’s quarterly refunding data. A lot of that is held abroad – notably by the Bank of Japan. Since rates are higher now than a few years ago, it will be refinanced at a higher rate. Peter Fisher helped keep W’s (fiscal) deficits down by lowering the average maturity of US debt between 2001 and 2003 – and, in the process, lowered the United States overall external interest bill. Alas, times have changed.
The Treasury tries to argue that there is nothing unusual about the level of foreign holdings of US Treasuries by comparing foreign share of the US market with the foreign share of other G-7 markets (p. 14). It turns out that foreigners own a comparable fraction of the government debt markets of Italy, Germany and France – but not the debt markets of the UK, Canada or Japan. It doesn’t take a genius to figure out why the comparison is a bit misleading: Italy, Germany and France are now all part of a common monetary union … French demand for German euro-denominated bunds counts as “foreign demand.” The US is more like the UK, Canada and Japan.
And there is also one other big difference between the eurozone and the US. The eurozone’s current account is roughly in balance (it has a small deficit right now due to high oil); the United States is not. Foreigners will end 2006 owning about $1 trillion more of US debt than they owned at the beginning of this year …
The US hasn’t had this much (net) external debt since the last Gilded Age – back when the US truly was an emerging economy. Look at chart of the US net international investment position on p. 7 of this Credit Agricole presentation.
Strange how the world turns.
- Corporate profits are at record levels relative to GDP.
- Wage income is increasingly skewed toward those at the top.
- The rest keep up by borrowing to supplement their stalled wage income – according to Ferguson, the IMF thinks home equity withdrawals were equal to a stunning 9% of all household disposable income in the third quarter of 2005.
- Social mobility is – according to some studies – now significantly greater in parts of Europe than in the US. The son of say a CEO – or a lawyer -- is more likely than average to become an investment banker … money helps get your foot in the door.
In this new Gilded Age, though, the US external debt is owned to Japan, China, Saudi Arabia, Russia and a host of other emerging economies – not to the UK. Despite what the statistics appear to say …