The table below shows the detail of Treasury (federal) debt ownership provided by the U.S. Treasury, and who could potentially be harmed if the government defaults. As of September 2022, a total of $30.93 trillion of U.S. public (federal) debt was outstanding. Almost $12.26 trillion was held by the Federal Reserve and U.S. government agencies, with $18.67 trillion privately held. Private investors include individuals (you could open an online account with the U.S. Treasury), large institutional investors, certain mutual funds (especially money market funds), pension funds (including private and government pension funds), depository institutions, insurance companies and other businesses, and foreign investors. State and local governments may purchase Treasury securities with excess funds. Approximately $6.9 trillion of Treasury securities were held by government agencies. Government agencies may invest in Treasury securities if they have a temporary surplus of cash. The largest government agency investing in Treasury securities – the Social Security Administration, which utilizes trust funds to pay retirement income, disability income, and Medicare.
Estimated Ownership of U.S. Treasury Securities (billions of dollars) (Source: Office of Debt Management, Office of the Under Secretary for Domestic Finance) Total public debt Depository institu- tions PENSION FUNDS
Federal Reserve and Gov. Accounts
Total privately held
U.S. savings bonds
PENSION- FUNDS Private
Insur- ance cos.
State and Local Gov.
State and Local gov.
Mutual funds
Foreign & Intl.
Other Investors
Sept 22
30,928.9 12,264.7 18,664.2 1,740.1 166.2
749.6
366.3
371.6 2,605.8 1,537.4 7,302.63,824.6
Mar. 21 Dec. 20
28,132.6 11,095.5 17,037.1 1,348.4 145.7
797.7
332.6 353.2
388.1 3,631.3 1,166.4 7,028.4 2,198.5 398.2 3,552.9 1,150.3 7,070.8 2,184.5
27,747.8 10,809.2 16,938.6 1,265.7 147.1
816.0
Potential implications if the debt ceiling is not raised and default occurs: • The government may not be able to fund needed programs or services. • Payments to Social Security and other government program recipients may be impaired. • The financial markets would react negatively to any default, and not be amused. Treasury securities are theoretically backed by the “full faith and credit (the power to tax and borrow) of the U.S. government”. Historically, Treasury securities have been viewed as not having default risk. However, if the U.S. fails on its promise and defaults, any future borrowing costs for the U.S. government would certainly increase. Bond market interest rates and volatility would rise due to increased risk and uncertainty. • Defaults on Treasury bonds would cause investors losses. Investors in Treasury securities include individuals, pension plans (both private and public), mutual funds (especially money market funds), depository institutions, insurance companies and other businesses, state and local governments, foreign investors, and federal government agencies (including Social Security). • The stock market would be negatively impacted through rising interest rates and expected economic decline. • An economic decline would occur due to rising interest rates, decreased consumer, business, and fiscal spending, and falling stock prices. Particularly given current economic uncertainty, any default and failure to raise the debt ceiling would have a strong, negative impact on economic growth. It would be ironic, but a default would exacerbate the very problems that caused the default – budget deficits and increasing federal debt. • Finally, a default would have major, negative impacts on the U.S. as the global economic leader and the U.S. dollar as the primary global currency. A default would likely trigger a decline in the value of the U.S. dollar as the demand for U.S. financial securities decreases. The demand for the dollar as a global currency, including its use as a reserve currency or certain countries “pegging” the value of their currency to the dollar, would subsequently decrease. This would open the door to another currency replacing the U.S. dollar in global transactions. Summary It has been a mixed bag for the economy thus far in 2023, with a few special add-ons thrown in. Inflation remained relatively high but decreasing, interest rates continued their climb, the labor market remained strong, and uncertainty regarding future economic growth remained. Going forward, inflation should continue to wane, the upward trek of interest rates is expected to end, and the labor market should cool as economic uncertainty remains. The special add-ons included two major bank failures and the debt ceiling saga. The two major bank failures appear to be fairly isolated as the federal government stepped in to assure depositors and prevent contagion. The U.S. defaulting on debt would be a huge mistake; the stakes are too high for the U.S. economy and its position as global, financial, and monetary leader.
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Center for Business and Economic Insight
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