(Photo: Geopolitical News / Rocco Sedona).
by Mario Lettieri and Paolo Raimondi * –
In the United States, wars, immigration and the electoral campaign have attracted a lot of attention, diverting it from the real internal emergency called public debt. The problem, however, remains and it is explosive.
America’s total federal debt has reached $34 trillion. From June to November it increased by 2,600 billion. Leaving aside the issues to renew maturing bonds, the increase in net debt was 1,700 billion in six months!
Although average rates are still relatively low compared to the current 5.5% applied by the Federal Reserve, annual interest on public debt has already exceeded $1 trillion, equivalent to approximately 16% of the federal budget. It’s not a little!
Who will buy public bonds, the famous Treasury securities? Debt auctions have become more volatile. Many foreign buyers and even major banks are holding back their purchases, leaving room for large funds and other speculators.
Among the foreign buyers is China which in August had American securities worth 800 billion dollars. In 2016 there were 1,300 billion. This is not just a political and economic decoupling from the USA. It is also the consequence of speculative international financial operations: many have taken loans in yuan with interest rates lower than those of the US and then converted them into dollars. China thus experienced significant capital flight which weakened its currency. To defend it, Beijing could sell more US Treasury securities.
Until the start of inflation, the Federal Reserve had been covering the holes opened by the debt by purchasing public securities and also the so-called asset back securities (ABS), of more than uncertain value. The Fed did this by creating new liquidity by disproportionately inflating its balance sheet, taking it from 3,800 billion dollars in 2019 to 9,000 billion in 2022. This dangerous unscrupulousness of the Fed in becoming a kind of bad bank is over. At least for now.
The ball is back in the government’s court, in the Treasury Department. The Treasury has found another loophole, narrower and more dangerous. Last September he said he wanted to carry out buyback operations from the beginning of 2024, i.e. the repurchase of his securities by the Treasury.
The initiative was supported by the buyback experience carried out in the period 2000-02, for a total of 67.5 billion dollars, when there was a budget surplus. The operation aimed to stimulate the then stagnant bond market and, with the purchase of short and medium term securities, contain the cost of interest.
This time, however, we are in situations of budget deficit, not surplus. Despite the many justifications to the contrary, opportunities are being created for large investors to resell previously purchased bonds to the Treasury. In other words, the government, in effect, should purchase low-interest bonds from private individuals in exchange for other new bonds at higher rates. A great deal for the State which will thus increase the annual interest rate to be paid!
Consider that unlike the Fed which can purchase securities by issuing new liquidity, each dollar of buyback must be financed with a dollar of Treasury issues.
When asked how to finance the operation, the US Treasury responds: “We plan to treat the increase in our buyback financing needs the same way we treat other issues.” New public debt, therefore. The US Treasury recalls, in fact, that after the decision in June to raise the debt ceiling “the entire increase was done with the issuance of Treasury securities for over 1,000 billion dollars which were well absorbed by the market.”
In truth, the operation reveals the state of volatility and fear that currently dominates the Treasury securities market. Recall that in the spring several medium-sized banks failed just as the Fed’s rate hikes made it clear that the bonds they held were losing money. With this move, the Treasury effectively admits that there are fears of further bank failures, sell-offs of securities and, above all, a growing reticence on the part of large investors in the government bond market.
According to the IMF, the current global public debt is almost 100 trillion dollars. A 40% increase compared to 2019. Total US public debt represents 32.4% of global debt. In the USA the debt/GDP ratio is 123.3%. We can say, unfortunately, that as Italy we are in good company
* Mario Lettieri, former deputy and undersecretary of the Economy; Paolo Raimondi, economist and university professor.