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Treasury ownership marks wealth divide
By Gillian Tett
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.
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.
gillian.tett@ft.com