Brad Setser

Follow the Money

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Just who bought all the Treasuries the issued in late 2008 and early 2009?

by Brad Setser
June 12, 2009

As Dr. Krugman notes, the Fed’s flow of funds data leaves little doubt that — at least during the first quarter — the rise in public borrowing was fully offset by a fall in private borrowing. An updated version of the chart I posted last week comparing government and private borrowing can be found on the website of the Council’s Center for Geoeconomic Studies.

Total US borrowing by the non-financial sector (annualized) was under $1.4 trillion in the first quarter — down from $1.9 trillion in calendar 2008 and $2.5 trillion in calendar 2007. In the first quarter, Americans borrowed less, at an annualized rate than they did in 2003.

The federal government borrowed over $1.4 trillion – -and if throw in state and local governments, total public borrowing topped $1.55 trillion. That isn’t a small sum. But households were borrowing (they actually paid down their outstanding debt in the first quarter). And modest borrowing by corporations was offset by a fall in borrowing by noncorporate business. Firms and households combined to reduce their borrowing by a bit less than $200 billion ($184.1 billion). To put that in perspective, households and firms borrowed over $2 trillion in 2006. That is an epic fall.

Borrowing less in aggregate translated into borrowing less from the rest of the world. If the flow of funds is right, the current account deficit in the first quarter in the first quarter was under $300 billion dollars ($293 billion according to table F107). $300 billion is closer to 2% of US GDP than 3% of US GDP. The result, obviously, is less need to borrow from the rest of the world — or to sell equity to foreign investors — to finance the United States import bill.

Who bought all the Treasuries the US government has issued in the last four quarters of data (q2 2008 to q1 2009)? Foreign demand for Treasuries — as we have discussed extensively — hasn’t disappeared, unlike foreign demand for other kinds of US debt. But foreign demand hasn’t increased at the same pace as the Treasury’s need to place debt. The gap was filled largely by a rise in demand for Treasuries from US households.


Before the crisis, foreign purchases formerly accounted for almost all new Treasury issuance. Over the last 12 months, foreign demand accounted for more like half of total issuance even as foreigners bought a record sum of Treasuries. And from what we know about the second quarter, I don’t think the basic story has changed.

Central bank custodial holdings continue to rise — just look at the last week’s custodial data. But the world’s central banks are no longer buying up all the debt the Treasury issuing. And Americans are now saving, creating a new pool of funds that needs to be lent out. Moreover, the financial sector isn’t borrowing — it actually is scaling back — which means that the household sector is lending less to financial firms, freeing up funds to flow into the Treasury market.*

Obviously, the price that pulls US investors into Treasuries matters greatly. But the basic sources of demand for the huge amount of Treasuries the US is now issuing aren’t really a mystery.

Paul Swartz of the Council did most of the heavy lifting it took to produce the previous graph. To simplify it, we aggregated Treasuries held by mutual funds with Treasuries held directly by households. At the end of 2008. mutual funds were the main buyers of Treasuries. In q1 2009, though, households themselves were the main buyers of Treasuries (see table F100).

And do also check out Paul’s updated charts tracking the evolution of the current US economic cycle — and how it compares with an average post-war economic cycles as well as the worst (and least bad, if that makes sense) post war slowdowns. They tell an interesting story.

* Total net borrowing (see table F1) fell even more rapidly than borrowing by the non-financial sector, as financial sector borrowing turned deeply negative in the first quarter of 2009. Looking just at “domestic non-financial sector borrowing” in no way understates the fall in total US borrowing.


  • Posted by FollowTheMoney

    Oil should hit ~$80 on this run and then reverse, so I’m not sure investing in commodities at these levels is ideal (especially with more global contraction ahead).

    I’m curious if the 134B in Tbills 2 japanese had with them are legit? And why is there no mention of this on CNN? Wouldn’t that be 1/5th of Japans reserves??? Counterfeit or not, this is a pretty big deal. Is it not?

    Pimco stated this weekend it expects the Fed to buy even more Tbills. At this point the FED is surely playing with fire in hoping to contain low interest rates. In my opinion, The crisis throwing the world into a greater global recession in Q3-Q4 may involve the dollar…

    If there is one commodity or two commodities that are attractive instead of Tbills i think one has to buy GOLD and SILVER. I’m not precious metals bug, but if we’re going to have currency devaluation wars and a Fed that’s looking at the trees in CENTRAL PARK to increase dollar reserves I think owning a bit in A or B would be wise.

    Also don’t forget the house voted to the AUDIT the Fed this weekend. This is pretty big news, and if the public gets a look at the balance sheet, who knows? We maybe for ‘panick’…

    Just a thought.

  • Posted by gillies

    in a contracting global economy would not high commodity prices resulting from a ‘flight to safety’ rather than industrial growth – be highly deflationary ?

  • Posted by Cedric Regula


    The price of Chinese Toaster Ovens will fall until the CTO Price + Chinese export subsidy per unit = Iron Ore Price per unit.

    Once prices plus subsidy fall to less than the Iron Ore Price per unit, they will cease production and there will be no more toaster ovens. Unless of course the USG offers a tax credit to support toaster oven price levels. This may of course be in the form of a Cap and Trade credit which consumers may redeem for cash at the Chicago Merc Exchange(minus trading commissions and fees, of course. It will also taxable at your income tax rate).

    I expect Krugman will come up with a better model than I’ve sketched out here.

  • Posted by Jason

    How do households buy treasuries Brad? Is it indirect through bank deposits or direct bids?

  • Posted by Cedric Regula


    Retail investors can buy up to $30K/year direct from the treasury with no fees and commisions that brokers would charge. But I expect that many do it by buying bond funds or bond ETFs.

  • Posted by jimspassion

    K T Cat
    Real economy indicators show signs of stabilization. See in particular the charts on manufacturing sentiment, nonfarm payrolls, oil prices, and car sales.
    Nonetheless, many of these indicators remain worse than anything hitherto experienced in the post-war period. The collapse in the federal government’s finances is unprecedented, raising questions about how the government deficit will be brought under control.
    We’re borrowing a lot more with no indication that the economy is growing to service the new debt. Maybe those successful Treasury auctions are a bad thing as they allow us to delude ourselves that all this debt is still OK.
    I agree delude ion is a major problem and we don’t have any creditable benchmarks to work with all comparisons’ seem to differ- it’s hard to pin point like with like – my sources in AU have continued to paint a bleak picture of shipping things are very quiet (don’t believe all you hear that AU is avoiding recession) ships are going in and ships are going out yes but with a lot of empty containers on board.

  • Posted by bsetser

    I’ll let paul know you appreciated his hard work on the charts; I also think they are quite good. We will consider adding a few more.

    Jason — don’t know, really. it wasn’t through mutual funds (separate line item). good question though. I simply am reporting the data from the flow of funds.

    Larry — tis a bit more complicated. By sustaining demand, the government’s borrowing keeps private income up and thus facilitates true deleveraging. if you pay down your debt but your income falls more, your leverage doesn’t fall. and if a bank prunes its balance sheet but its losses cut its capital more, its leverage doesn’t fall. this was one of Keynes insights i think — namely that in the absence of government intervention, a self reinforcing downward dynamic can impede effective deleveraging. that said, there is no question that the public sector’s debt — and thus its leverage — is rising.

  • Posted by denarius

    Alfred – “But if the Fed soaks up the remaining Treasuries and becomes a net buyer isn’t that like monetizing debt and therefore inflationary? The Fed is saying they are not going to do that.”

    News flash: The Fed are a bunch of lying puss bags. Pictures at 11…