Where has all the money gone?

Author: Graham Coxell
Professional Adviser | 29 Feb 2012 | 15:00

Categories: Investment

Topics: blog| Rowan Dartington| Treasury| UK| QE| China| US| Germany| France| Spain| Portugal| eurozone| Ireland| Federal Reserve| Bank of England| Recovery Act | Super-Committee| Royal Bank of Scotland| FSA


Graham Coxell, chief executive of Rowan Dartington, asks: if the US government has a debt pile approaching $15trn, who on earth is it in debt to, and what is the interest charge?

At the last published count, the US Treasury had debts of $14.7trn or, roughly, $42,000 per head of the population. This figure caused political deadlock in Congress last year when the Super-Committee failed to agree an extension to its own ceiling, which would have caused the US Treasury to default on its loans to investors. Not surprisingly the ceiling was eventually extended and the capitalist machine carried on.

We heard recently that the UK has debts of £1trn and the rest of Europe has managed to accumulate €7trn of inter-government debt.

When we consider that Japan still has considerable debts from its lost decade, then it becomes apparent that most of the developed sovereign states are living on borrowed time.

With the exception of quantitative easing (QE), which actually creates new money to buy up debt, someone owns all this debt and is receiving an interest return. Who is this someone?

Actually, this is relatively easy to answer. Taking the US Treasury market in isolation, roughly $10trn of the $14.7trn is owned by institutions, public bodies, pension schemes, banks and corporations. The remainder is owned by overseas Treasury departments, which have been investing their trade surpluses into US Treasuries for years.

By order of magnitude, mainland China owned $1.1trn of US Treasuries at the end of 2011, Japan $1trn, the UK including the Channel Islands and Isle of Man $415bn, the oil exporting nations of the UAE owned $236bn, Brazil $207bn and so on, and of course the Fed owns rather a lot through its QE programmes.

This ownership structure is mirrored in the UK and, to a lesser extent, in Europe, where the sovereign states have bailed out the banking system and taken on the debts, mortgaging the taxpayer for as long as the debt takes to mature.

A sign of this imbalance can be seen when you consider there is currently $1.7trn of cash sitting on corporate balance sheets in the US – and around €700bn in Europe – as companies are reluctant to invest or expand their cost base when their sovereign exchequer and trading partner states are in such a precarious position.

The issues to consider are how on earth the capitalist West has got itself into this situation and how is it going to continue to not only service the debt but crucially replace it when it matures?

The eurozone

This is precisely the problem in the eurozone at the moment, where €1.2trn matures this year, with the hall of shame headed by Italy requiring the refinancing of €312.1bn, Spain €138bn, Greece €44.6bn, Portugal €23bn and Ireland €6bn.

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