US treasuries – who owns it? By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

November 25, 2015 | Posted by bobbysrinivasan << back to blog

The US public debt is currently around US $ 19 trillion. This is no small change and the Federal debt burden will be distributed across the entire current and future American population. The per capita debt will exceed US $ 50,000. Granted that the US managers, mutual funds, pension funds and individuals have gobbled up most of these outstanding government bonds, there is still a large portion of it held by foreign citizens and foreign countries. Individuals outside the US buy and sell these bonds in the denominations of US $ 1000. They will need to fill a W-8 form in which they declare that they are not resident aliens nor American citizens and they don’t pay any withholding tax on interest and capital gain. In the far-east wealth and portfolio managers buy these bonds in very large quantities as it is considered risk free.

Now some statistics on US treasury ownership outside the US, Brazil is holding 256.7 billion US dollars of Treasury as of July 2015. India owns 116.3 billion dollars worth of US treasuries as of June 2015. Japan owns $ 1.197 trillion dollars worth and finally China owns $ 1.24 trillion dollars worth.

Generally countries with large current account deficit arising out of merchandize trade will find their currencies weakening. This is because of this deficit will eat away their forex reserves. In the case of US, it is different what ever may be the size of the trade deficit the US dollars finds its way back to the US in the form of capital account to offset the trade deficit. There are several reasons for it.

From among countries, US appears to be the safest place to invest.
The US dollar is still the dominant currency in the world and continues to enjoy the reserve currency status.
If needed the funds are easily accessible as the US treasuries are highly liquid.

A time may come in the future which the other currencies like the Chinese Yuan, Singapore dollar may become additional reserve currency. Current US economy after 2008 sub-prime crisis is not vibrant as before. Eventhough it manages to show some growth the per capita GDP is not growing and the median income is struck at 28200 dollars. The wealth creation and the benefits of it is restricted to select privileged people. According to a recent survey in 2014, 93% of all the GDP earnings went to the top 1% of the citizens. The distribution therefore is highly skewed.

Finally, the global economy is slowly drifting to dark ages with the prices of Aluminium, copper, gold, silver, crude oil, iron ore, nickel falling to such ridiculous levels. This makes one wonder as to how much lower these commodity prices can go before it stops. The threat of deflation is very much real now and the emerging markets will soon see liquidity crisis due to severe outflow of wealth. Look at Brazil, Russia, South Africa. All their currencies are down more than 50% in value against the dollar.

It appears as though that a new agreement similar to the Bretton Woods is very much needed. Until that time the currency crisis with countries competitively devaluing will become more and more evident and that will seriously affect the entire global financial system. With a little bit of attention by the global government to the upcoming currency crisis they could see as to how the problem will pan out? This has happened before with the British pound and dollar during the President Roosevelt time. Let us wait and see as to how all these will eventually work out.

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