November 14, 2013 9:16 am

Treasury ownership marks wealth divide

Concentration in top 1 per cent has risen sharply

Who owns America’s ever-swelling pile of government debt? This is a question that has provoked considerable angst among US politicians recently; or at least it has in relation to national identity.

Little wonder. Half a century ago, the share of US public debt held by foreigners was less than 5 per cent; but in 2008 that ratio breached 50 per cent. And while it has since fallen back slightly (because the Federal Reserve has been gobbling up bonds) the shift in ownership is nevertheless stark – along with the new power of creditors such as China.


On this topic

Gillian Tett

But there is a second important point about America’s debt that has hitherto received surprisingly little attention: the shifting nature of bond investors who hail from inside the US. In past decades, it has often been assumed that Treasury bonds were widely held by the public. Indeed, since the days of Alexander Hamilton, who founded a strong central US Treasury, many politicians have thought (or hoped) that a broad involvement in the bond market – be that among widows, orphans, middle-class citizens or oligarchs – would be a source of common civic identity and social glue.

However, Sandy Hager, a postdoctoral research fellow at the London School of Economics, has recently crunched through the historical data. This research suggests that if you look at the “publicly held” US government bond markets (ie the parts not held by another US government agency, such as the Fed), foreign ownership of federal bonds has risen from around 5 per cent in 1970 to 55 per cent today, at the expense of US households and business.

More specifically, the ratio of the bond market held by corporations during this period has declined from around 40 per cent to 30 per cent, while for households it has fallen from around 30 per cent to almost 15 per cent.

Concentrated ownership

But what is most interesting is the picture inside the “household” category. Contrary to the usual assumption that government debt is widely held, Mr Hager’s data suggests ownership has become far more concentrated recently, echoing a wider concentration of wealth in the US.

Back in the 1970s, for example, the richest 1 per cent of Americans “only” held 17 per cent of all the federal bonds that were in private sector hands. This was partly because during the second world war and in the immediate aftermath there was a strong attempt to distribute Treasuries widely. But since the 1980s, the proportion of debt owned by the top 1 per cent started to rise sharply, hitting 30 per cent in 2000 and 42 per cent in 2013. The last time it was this high was in 1922, when the ratio was 45 per cent.

Now, this picture may not be entirely complete. Mr Hager himself admits that the historical data are often patchy, and it could be argued that modern citizens are also indirect owners of government debt through public agencies and pension funds, in ways that do not show in the data. But, if nothing else, this pattern gives new significance to the questions that Hamilton and other historical figures first grappled with three centuries ago: namely, is public debt a potential source of civic cohesion? Or merely a subtle way for elites to entrench their power?

Skin in the game

Mr Hager, for his part, takes the latter perspective; after all, he points out, this pattern means the richest are collecting more and more interest income, but not paying a proportionate increase in taxes.

“Over the past three decades, and especially in the context of the current crisis, the ownership of federal bonds and federal interest has become rapidly concentrated in the hands of dominant owners, the top 1 per cent of households and the 2,500 largest corporations [while] the federal income tax system has done little to progressively redistribute the federal interest income received by dominant owners,” he writes.

“Public debt has come to reinforce and augment the power of those at the very top of the social hierarchy,” he adds, concluding that “[Karl] Marx’s notion of a powerful ‘aristocracy of finance’ at the heart of the public debt is . . . a very real feature of the contemporary US political economy.”

No doubt most bond investors would disagree; the name “Marx”, after all, is taboo on dealing floors. But even if you disagree with Mr Hager’s leftwing political bent, the data certainly casts a new light on the political dynamic in the current fiscal rows.

To the wealthy elites in the US who hold government bonds, it seems self-evident that the government needs to preserve the sanctity and value of Treasuries; this group has a strong incentive to ensure this happens via fiscal reform (particularly if this entails budget cuts, rather than higher taxes.) But what is rarely debated is that millions of poor Americans have far less (or no) skin in the Treasuries game. Little wonder, then, that the fiscal debate is so polarised, and unlikely to become any less so any time soon.

Public Debt, Ownership and Power, The Political Economy of Distribution and Redistribution by Sandy Brian Hager; unpublished PhD at York University, Canada

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  1. Report Le Grand Seneschal | November 14 1:57pm | Permalink
    It is oh so convenient to classify the largest holder of U.S. debt, the Social Security Administration, ($2.7 Trillion), as public, ignoring the fact that those funds came from payroll taxes on workers and employers. Similarly ignoring pension funds is the same thing. Saying the little guy doesn't have a stake is a gross distortion of reality!!.
  2. Report Nelson Alexander | November 14 1:56pm | Permalink
    Marx also predicted a falling rate of profit in the industrial sector, which is why the 1 Percent have evolved into a pure rentier class that operates through financial firms much as the aristocratic "tax farmers" of the Roman Empire.

    Indirectly, they simply collect a share of U.S. taxes and the debt returns issued by banks. producing nothing. The political aims of "balancing the budget" and "public austerity" are simply ways of increasing their revenue through taxation of the working classes.

    This also goes a long ways toward explaining the virulence of American politics today.

    The dirty secret is that the U.S. government, the "public debt," and the regressive tax structure are now the main sources of wealth for the 1 Percent, and so it is crucial that they exercise control over federal spending, debt, and fiscal policy. By way of evidence note that, in direct contrast to their rhetoric, Republican administrations invariably increase government spending and debt, in which the 1 Percent are effectively shareholders. They regard Democratic administrations as the "collection phase" of the operation.

    Again, all of this evolved out of the real falling rate of profit in productive sectors of the economy. What were formerly capitalist enterprises are now "assets" for the generation of debt and its eventual collection through imbalanced federal taxation. To this extent, the Tea Partiers have point, however crudely misunderstood. The left must recognize that "public debt" has become a hidden source of upward wealth transfer and downward claims on the working classes.

    Unfortunately, it would take another Marx to untangle and clarify all this and offer some political way forward. Any takers?
  3. Report jacques courtois | November 14 1:53pm | Permalink
    You neglect to mention that these Treasuries are providing next to no return which turns the leftie redistribution argument on its head.
  4. Report theenlightenedone | November 14 1:31pm | Permalink
    What is the point of this article ? Data is patchy, conclusions are even patchier and biased by political bend. Why 17% or 42% have any significance. And without the denominator i.e. what % of the wealth of these 1% is comprised of these bonds, how is it relevant or comparable to other countries (I wonder if there is any other country with such data addiction or transparency whichever way you look).
  5. Report Scute | November 14 1:14pm | Permalink
    I remember reading a salutary tale about the thinking behind the issuing of War Bonds for civilians in WWII. Apart from the obvious societal cohesion issue, which was crucial for a nation on a war-footing, the reasoning was that, by spending their money on savings, the factory workers producing the essential tanks,
    planes and bombs would have less disposable income to play with. That way, they would be more inclined to stay in, stay sober, sleep more and work more hours.

    Fast-forward to the 2000's when China owns a huge chunk of the national debt. The average US worker didn't fund this debt by buying treasury bonds. In fact, a vanishingly small number of ordinary, hard-working US citizens realised that China was funding a large part of government spending and that one day they would have to pay this back via their own pay-check taxes. Put another way, if the average US worker hasn't bought the Treasury bonds to pay for the school being built on the next block or the bridge downtown, he thinks he has more money in his pocket than he really does. He, of course, assumes that the taxes he is already paying are funding all this impressive economic activity. The spare cash that would formerly have been used to buy the bonds and fund the the infrastructure is thought to be a welcome increase in disposable income and gets spent on more household goods, cars and holidays.

    By this process, a consumer boom ensued. This boom was indirectly funded by China. It was indirect by virtue of the fact that the money went to the US government (Treasury) which then felt it could spend with abandon without taxing the populace for that spending (until some hazy date in the future). But the net result was the same as channelling hundreds of billions of dollars directly into US workers' bank accounts without telling them that it was a loan that would have to be paid back.

    This build-up of invisible household debt through the 1990's and early 2000's and the irrational exhuberence it engendered, was the main cause of the crash. Sub prime may have tipped the balance prematurely but it was only a potential drain on taxpayers: if every sub prime defaulted the bill would have been a little over $1 trillion. This could have been averted with a $1 trillion government fund to underwrite each and every defaulting mortgage thus protecting the banks. In practice, the fund would have been an order of magnitude smaller, causing little drain on government borrowing as compared with successive rounds of QE.

    So why were the banks in such a panic in 2008 despite the knowledge that sub prime wasn't quite the death-knell it was cracked up to be? It was the knowledge that the foreign debt overhang had reached unsustainable proportions and that any sub prime bail-out was going to cast a spotlight on it, fuelling widespread concern over how it was going to be paid back. The banks were preempting the sentiment that the average US worker would inevitably have, namely, that he had been persuaded to overspend for 20 years while China funded his lifestyle- and that spending had to stop forthwith.
  6. Report Captain Swing | November 14 12:50pm | Permalink
    Well done GT for, once again, coming up with an interesting subject and presenting it so well (explaining that it interests a wider group than Marxists). But, will the top 1% not get burnt when interest rates go up?
  7. Report Mynoduesp | November 14 11:37am | Permalink
    @ James

    Could also say that negative yields are a result of disastrous asset allocation. They have invested in an arguably insolvent entity that is spending way more than it brings in, and is printing money on a huge level. Of course, in this current environment, it is about preserving capital rather generating return, and most of the 1% will know this and are hence happy to take the 'loss'.
  8. Report Mynoduesp | November 14 11:31am | Permalink
    Amazing piece!
  9. Report James Mackintosh, FT | November 14 11:28am | Permalink
    Worth pointing out of course that government bonds had negative real yields for almost five years, so those wealthy bond owners have been paying a sort of tax for the privilege of funding the government.
  10. Report Prester John | November 14 11:08am | Permalink
    Very interesting observations but the qualification that the analysis needs to take into account indirect holdings is an important one. So too is the issue of the real return on holdings of the debt.

    Given the current low levels of real and nominal interest rates, this phenomenon is also a potential source of redistribution. In my parents' generation, inflation and negative real interest rates effectively expropriated the (then) quite widely distributed wealth of the holders of War Loan and longdated government stock - all to the benefit of the more financially savvy who borrowed or invested in equities. Maybe the same is about to happen to the 1%?
  11. Report Philip56H | November 14 10:57am | Permalink
    Gillian - Interesting article but

    "this pattern means the richest are collecting more and more interest income, but not paying a proportionate increase in taxes."

    needs more explanation. Its not clear from your article why this should be the case.
  12. Report Is it that easy? | November 14 10:53am | Permalink
    US Treasuries have been in a 30 year extreme bull market....the "elites" may find the next 30 years less comfortable.
  13. Report DCDonald | November 14 10:07am | Permalink
    Excellent! Fresh findings placed in their sociopolitical context by an experienced journalist. This is an extremely valuable piece of the puzzle which was previously composed mostly of income disparity data.
  14. Report Paul Munton | November 14 9:56am | Permalink
    Not sure I understood this. Is the income from US Treasuries not subject to tax in the US? Or do you just mean that the tax rate has remained constant over the last fifty years whilst taxes paid by non-bond owners have, in general, risen?