Biggest Holder of Treasury Debt? The Gnomes of Constitution Avenue

The biggest holder of debt issued by the Treasury of the United States is no longer China, Goldman Sachs, or your 401(k) plan; it's the Federal Reserve.

Nothing to see here. Move along. Mumble monetary mantras: uncommitted bank reserves; banks aren't "reserve constrained"; quantitative easing.

Please keep in mind that the Fed also holds a bit over $1 Trillion in mortgage-backed securities nobody else wanted.

Lots of very bright fellows in expensive suits -- well-credentialed fellows anointed with the holy chrism of Wharton, Sloan, Kellogg, Tuck -- will tell you that this is just a liquidity adjustment, the exercise of another tool of monetary policy.  But there is a fundamental difference between selling debt to you and me and China, and selling debt to the Federal Reserve.  You and China have in common the fact that to purchase the debt, you must pay the Treasury in dollars, which you have to get from somewhere.  The Federal Reserve Bank, on the other hand,  intones "fiat denarii," and the "money" is created from nothing.  It comes into being because the Fed says so.

Fed holdings data is HERE, recent purchases (11/4 - yesterday) are HERE.  We confess that coffee came out of our nose when we saw that yesterday's Fed purchase was $1.6 Billion in TIPS, Treasury Bonds indexed so as to protect the holder against inflation.  A wise move.

In 2009 the entire world produced something like $70 Trillion worth of stuff.  Between yesterday morning and yesterday afternoon, $1.6 Billion new dollars were created to chase that stuff around.

If monetary policy gives you a headache, then you might prefer to ponder the fiscal situation.  Using Congressional Budget Office data and forecasts, here's a representation of the composition of the Federal budget over the next 60 years or so:

Have a great day!