Where is the dollar heading? Why are the prices of everything going up while my wages are stagnating? Do deficits matter? Is the price of gold indicative of a market mania? Why is there so much fuss over the Fed?
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
- Ludwig von Mises
Home | News Headlines | Article Index | Bullion Dealers | Economic Data | Market Data Feeds | Advertisers | About | Support Us | XHTML
  • If laid end to end in US$1 dollar bills this amount of money would reach what planet from the Sun?

    Click here for the answer
Global Money Supply
  • Global Money Supply Data
Daily Metal Prices
Bullion Dealers
Recommended Books
  • We entrusted the experts with our financial security and now we're reeling from the economic crisis. How do we get back on our feet...and invest wisely?

    In The Wealth Code: How the Rich Stay Rich in Good Times and Bad, financial planner and investment strategist Jason Vanclef delivers straight answers...and solutions.

    Visit the book website at

  • Empire of Debt
    Bonner and Wiggin enumerate a long list of chronic ailments that imperil the American financial system--a massive trade deficit, soaring personal and government debt, a housing bubble, runaway military expenditures.
  • The Intelligent Investor
    The classic bestseller by Benjamin Graham, perhaps the greatest investment advisor of the 20th century, The Intelligent Investor has taught and inspired hundreds of thousands of people worldwide.
  • Methods of a Wall Street Master
    This book covers all the important aspects of making money and integrates them into a unifying philosophy that includes economics, Federal Reserve policy, trading methods, risk, psychology, and more.
  • What Has Government Done to Our Money
    If you ever wondered about why prices keep going up, if you ever wondered why cars don't cost $2,000 anymore, if you asked questions like this and never thought you were getting a full answer, this is the book you need to read.
  • Economics for Real People
    Economics for Real People is a clearly-written overview of "Austrian" economics, a libertarian school of economic thought founded by thinkers from Central Europe in the early 20th century.
  • Economics in One Lesson
    "Economics in One Lesson", Henry Hazlet's, book makes a powerful and persuasive argument in favor of a free market economy.
  • The Road to Serfdom
    This classic by one of the 20th century's leading libertarian thinkers has established itself beside the works of Orwell and others as a timeless meditation on the relationship between human freedom and government authority.
  • Crash Proof: How to Profit From the Coming Economic Collapse
    For those accustomed to America's economic dominance, Crash Proof is a frighteningly forthright wake-up call.
Printer Version E-Mail Article Discuss

Who Do We Owe and How Much?

This essay takes an in-depth look at the magnitude and consequences of the large debt levels within the United States. Topics discussed include: composition of foreign and domestic holders of U.S. debt, consequences of the government borrowing from the Federal Reserve, and a look at the current U.S. housing market.

The National Debt

The national debt (also known as public debt) is money owed by the federal government. As the government represents the people, government debt can be seen as an indirect debt of the taxpayers. The U.S. government incurs debt by issuing treasuries (bills, notes and bonds).

These securities are either sold on the open market or directly to the Federal Reserve. The U.S. national debt, as of July 17, 2007 stood at $8.887 trillion. In addition to the national debt, the State and Local debt at the end of 2006 stood at just over $2 trillion.

Some consider that all government liabilities, including those that the government has contracted for but not yet paid, should also be included in the national debt. Corporations must report such liabilities in their annual financial statements under GAAP (Generally Accepted Accounting Principles).

These "off-balance sheet" items include future payments for federal pensions, Medicare and Social Security. Inclusion of these obligations would dramatically increase the U.S. national debt to $59.1 trillion or 403% of GDP! On a per capita basis this amounts to $516,348 for every U.S. household! By means of comparison, the average American household owes $112,043 for mortgages, car loans, credit cards and all other debt combined.

To Whom Do We Owe the National Debt?

The Department of the Treasury publishes The Debt to the Penny and Who Holds It. This up-to-date information divides the debt into two sections - Public and Intergovernmental Holdings. The former grouping includes domestic and foreign owned portions of the debt. The U.S. Treasury publishes Ownership of Federal Securities which is another break-down of the composition. Through combining these two data sets, as of December 2006, the composition of the U.S. National debt was:

The breakdown of the domestic owned portion of the national debt is as follows:

The U.S. Treasury publishes a listing of the Major Foreign Holders of the national debt.

Of the U.S. debt owned by foreigners, central banks own 64% with private investors owning nearly all the rest (Analytical Perspectives - Budget of the United States Government, Fiscal Year 2006 p. 257). As of the end of 2006, U.S. treasuries made up 33% of Mainland China's official foreign exchange reserves and 68% of Japan's!

The magnitude of the foreign-owned portion of the national debt is nearly three times the total amount of currency in circulation! Official numbers released by the Federal Reserve for June 2007 show the volume of currency at US$755 billion.

The Federal Reserve

The Intergovernmental Holdings section refers primarily to governmental borrowing from the Federal Reserve. This is sometimes referred to incorrectly as "the government borrowing from itself".

To begin with, the twelve regional Federal Reserve Banks are private institutions operating collectively in a quasi-governmental capacity. When the government spends more than it receives in tax revenue, it experiences a budget deficit. To make up this shortfall, it issues new debt. This takes the form of treasuries that are sold on the open market. When there is not sufficient interest in the open market to buy up the required number of treasuries, the government will turn to the Federal Reserve, otherwise known as the "lender of the last resort".

When the government "borrows" from the Federal Reserve, both the treasuries and the money are literally created out of thin air. These newly acquired government securities increase the assets of the Federal Reserve Bank. This enables it to lend out many times that amount through the fractional reserve banking system. The process, known as "monetizing the debt", is inflationary.

For example, let us assume that the legislated reserve ratio is 10% and the government requires US$10 billion from the Federal Reserve to cover a shortfall. The government creates US$10 billion in government bonds to give to the Federal Reserve who issues US$10 billion in newly created money to the government. Interest payments on these bonds are paid for by tax revenue and/or additional deficit spending. The Federal Reserve may now legally lend out US$100 billion.

This credit expansion as a direct result of the U.S. government borrowing from the Federal Reserve dilutes the value of all outstanding currency. When the value of the dollar goes down, prices go up. In effect, it is theft from everyone who holds U.S. currency because they can now buy less with it today than they could have before.

The U.S. Total Debt

The Federal Reserve's publications, Flow of Funds Accounts of the United States (also known as the Z.1 Releases) contain a great amount of data regarding money flows between various sectors. Missing from this data set is the portion of debt owed by the federal government to the Federal Reserve. To retrieve that data, one must subtract the Gross Federal Debt held by the Public from Gross National Debt published by the St. Louis Federal Reserve. This data should be added to the Federal Government Debt figures in table D.3 of the Z.1 Release to account for the complete national debt.

The following chart shows accumulated debt from the national, household and corporate sectors from 1956 to 2006.

The Housing Bubble

The household sector has surged nearly 50% since 2001, increasing from $7.66 trillion to 12.82 trillion in 2006. Most of this jump is attributed to mortgage debt that has risen 83% since 2001. This has been what market analysts have been referring to as the "Housing Bubble". Starting in 2001, ordinary citizens became attracted to an increasingly speculative real estate market.

The combination of increasing money supply ("liquidity") and advent of 40-year low interest rates along with exotic loans (negative amortization, adjustable rate, buy-down, no credit check) encouraged heavy leveraging as house buyers attempted to purchase more expensive houses in hopes of reselling them in a few years at a much higher price to another buyer.

Marketing of these types of loans reached a crescendo in late-2004 and early-2005. The sub-prime industry offered buy-down mortgages whereby the buyer would pay a discounted interest rate for the first few years (otherwise known as a "teaser rate"). These low starter payments were marketed so that the buyer could "afford home furnishings and renovation projects". When it came time for these interest rates to readjust, many homeowners found that they were unable to cover their monthly mortgage payment.

As a result of this, the U.S. is currently experiencing a financial meltdown in the sub-prime mortgage industry within the U.S. To date, 99 firms have either gone bankrupt or have dramatically transformed their business. Over 1.4 million homes are currently in some stage of the foreclosure process.

Time's June 13, 2005 cover article of "Home $weet Home" was taken by some to be indicative of a speculative top and a portent for an upcoming market reversal. Just as Business Week's famous August 13, 1979 cover story called for the end of the stock markets at the moment when the largest bull run was just getting underway.

But "We Owe it to Ourselves"?

Does the debt matter, after all, don't we owe it to ourselves? Only if you acknowledge that "we" and "ourselves" are in fact very different entities. The Federal Reserve's Z.1 Release gives insight as to who exactly owes the money, and to whom.

Clearly this is a one-way street. Households, government and non-financial businesses are becoming more and more indebted to foreigners, banking and financial institutions. Debt is not wealth. It is a claim on future production.

"The budget should be balanced; the treasury should be refilled; national debt should be reduced; and the arrogance of public officials should be controlled." (Cicero, 106-43 B.C.)

Published on - Jul 17, 2007.


© 2007 DollarDaze


Mike Hewitt Mike Hewitt is the editor of, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies. His website also provides a no-cost market data feed service with up-to-date quotes on currency exchange rates, commodity prices and major indices. Mike can be emailed at
Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.

This article has been favorited 15 times on | Make this your favorite article

Posted in Monetary Commentary, Housing Bust, Mike Hewitt

Search DollarDaze
  • Add to Technorati Favorites
Your Purchasing Power
  • Click to see full-sized charts
Web Media
  • Aaron Russo Interviews Congressman Ron Paul
  • Excellent video explaining the US Federal Reserve
  • Money As Debt
  • I.O.U.S.A.
  • Chris Martenson - The Crash Course
  • Money - A Brief History of the American Dollar
Sponsored Ads
London Metal Exchange
  • Click to see full-sized charts
Sponsored Ads
Donations Accepted

  • Help support the development of by donating today.

    Click here to learn about other ways you can help us.