September 2011 U.S. Treasury Statement and Debt Overview

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Outlays of $304.7 billion and receipts of $240.2 billion added another $64.5 billion to the federal budget deficit in September, a month that typically sees revenue slightly exceeding outlays. That brought the FY2011 U.S. federal deficit to $1.299 trillion ($5 billion higher than FY2010), and the federal debt held by the public stood at $14.790 trillion at the end of September.
 

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Foreigners held $4.573 trillion, or 31 percent of the U.S. public debt at the end of August. China remained the largest foreign creditor ($1.137 trillion). The United Kingdom was the biggest buyer in absolute terms ($43.8 billion; 12.4 percent), while the Caribbean banks had the largest percentage change ($32.5 billion; 25.3 percent). Holdings by the “other” (aggregated) category inched up in August after having trended lower since last November.
 

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The Federal Reserve continued to put more distance between itself and both China and Japan during August in terms of U.S. Treasury holdings. However, the Fed’s pace of net Treasury purchases has slowed considerably. China divested itself of some Treasuries (although the U.K. often serves as a proxy buyer for China) while Japan added modest amounts to its holdings.
 

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According to the Treasury International Capital (TIC) accounting system, flows into the United States for all types of investments broke off a four-month slide and amounted to $89.6 billion in August -- evidenced by the sharp jump in the three-month-average of net inflows.
 

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One item that bears watching is the large sell-off of U.S. Treasuries since September. The Federal Reserve holds those securities in custody for various foreign central banks. Since September, those central banks have divested themselves of $73.9 billion in Treasuries, the greatest amount on record. The concern over this development is two-fold: 1) The August 2007 sell-off either triggered -- or at least was associated with -- the first credit crisis that eventually turned into the December 2007 recession. 2) Should central bank selling continue, the Fed may become the buyer of last resort, which would likely result in higher interest rates and inflation.