Foreigners Absorb 90% of U.S. Treasury Issues: Q3 2005
The primary buyers of the Treasury notes and bonds that the U.S. government issues to cover the shortfall between government spending and tax receipts, are foreign investors that generally pay for the bonds with dollars obtained by selling more goods and services to the U.S. than they purchase.
Over the decade, 1995-2004, the U.S. Treasury issued $905 billion in federal government securities, while the rest of the world bought $1,275 billion of these bonds. Foreign investors made up the difference by buying Treasury securities from U.S. individual investors and commercial banks in the secondary market.
How The U.S. Finances Deficit Spending
The graph, below, shows that during the four-year period 1998 to 2001, there was no need to issue Treasury securities, because there was a fiscal surplus. During this period, the government repurchased government bonds, mainly from state and local governments, foreign investors, broker-dealers, commercial banks, and domestic households.
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Principal Buyers of US Treasuries
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In the years following nine-eleven, heavy military expenditures resulted in a return of the fiscal deficit, again requiring the issuance of Treasury securities.
In 2002, immediately following the terrorist attack, foreigners bought only 55% of new Treasury issues. The remainder of the bonds were taken up by state and local governments, commercial banks, and by the ‘monetary authority’.
The ‘monetary authority’ of the United States consists of the Federal Reserve Banks and certain monetary accounts of the U.S. Treasury Department. The largest asset of the monetary authority is Treasury securities, which are bought and sold by the Federal Reserve System through open market operations.
The liabilities of the monetary authority are primarily currency held by the public and by commercial banks and reserve deposits owed to depository institutions by the Federal Reserve System.
In other words, when the government is not able to get foreigners to buy enough Treasury securities to cover the fiscal deficit, and is not able to coax commercial banks or state and local governments into absorbing the difference, it prints money and buys the bonds itself.
Although foreign investors were skittish about buying U.S. Treasury bonds in 2002, immediately after the attack of nine-eleven, by Q3 2005 confidence had returned, and foreign investors absorbed 90% of Treasury securities issued.
(See Flow of Funds Table F209.)
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