He Who Owns the Mortgage Owns the House

As too many homeowners are learning, when someone else owns debt against your assets, they in fact own your assets.  Homeowners, many of which who have been in their homes for a long time are finding that banks are calling in debt as the reign in their balance sheets.  When that happens, if the homeowner does not have the cash to pay down the debt the bank can in fact repossess the property.  Or, if they like, they can use their bargaining power to force the homeowner into a repayment program on their terms with a good number of potentiality intrusive stipulations.

Why am I bothering with the obvious?  Well think about our newly financed bailout.  It will be interesting to track ownership of US Treasury securities over the next couple of years because the same rules hold true for the good old US of A.  The chart below uses data as of January 2009, and lists the largest holders of US Sovereign debt by size, the largest of which is of course China, followed by Japan and then the United Kingdom.  In fact those three countries alone own more than half of all of our foreign debt outstanding, which is a bit more than 50% of all of our sovereign debt outstanding, or to be clear, China, Japan and the UK own 25% of America’s debt.   Forget the recent bugaboo about inflation for a minute, or what happens if countries decide they no longer want to finance our bailout which is generally to their benefit anyway.  These would be serious issues, creating more real economic drama, but they would pass in relatively short order, as did the massive inflation that erupted through the 1980’s.

The bigger problem here is that we are offering tremendous bargaining power to other developed and developing nations, some friendly and some potentially unfriendly.  Throughout our own history we have used such leverage to the benefit of our own foreign policy, and it would be naive to think the process won’t work in reverse.

We are offering a once in a lifetime opportunity to give significant leverage away to foreign powers, not just financial leverage, but certainly political, economic and possibly even social leverage.  At the  moment our biggest three creditors are friendly nations, with China being the largest and largest “unknown”.  The staggering level of debt we are creating to rightfully steady the economy is going to place a burden on our children far greater than future interest payments.  We are giving away pieces of our democracy, foreign trade bargaining power, and potentially our national security.

All this talk of treasuries imploding if other nations decide to stop buying them, or worse begin to sell them is probably overdone.  While current yields on US debt is probably unsustainably low, the bargaining power premium foreign sovereigns are gaining by absorbing our relentless need to issue new debt more than makes up for the paltry yield.  Imagine if you had enough money to lend without limit to Donald Trump just before bankruptcy.  At the very least you’d own a few buildings for pennies on the dollar, at the very best you’d negotiate an exclusive on a good chunk of his future business.

What happens if we need debt forgiveness?  What pieces will China ask us to take off the chess board?  What favors will they call in?  Which assets will they select?  Will they negotiate a one sided deal to secure future energy demands?  Once the banker sits in the drivers seat there is little limit to what he can require if it means he has the power to kick you out of or to keep you in your home.

This will have deep implications for foreign policy for at least a generation.

The chart below uses data from www.treas.gov.  I simply dumped it into excel and created the chart below.  The outer ring is the most recent data from November 2008.  The inner ring is from November 2007.  The rings in between represent each month in between.  Apparently the UK has been one of our largest supporters, more than doubling their ownership of our debt over the last year. China increased their ownership by nearly 50%, and even some of our enemies have grown their holdings of dollars by nearly 50% as noted by the oil exporting countries which includes Iran.

Major Foreign Holders of Treasury Securities (Chart)

Major Foreign Holders of Treasury Securities (Chart) as of January 2009

The raw data is shown in the table below and available at: http://www.treas.gov/tic/mfh.txt

Major Foreign Holders of Treasury Securities (Table)

Major Foreign Holders of Treasury Securities (Table) as of January 2009

Will foreign governments seize power from the US through debt covenants?  Countries that hold 25% of all of our outstanding debt wield massive power.  If this bailout ends up costing what folks like Roubini estimate, that number will be getting much larger.

Let’s not forget that he who owns the mortgage owns the house.

Major Foreign Holders of Treasury Securities
http://www.treas.gov, Accessed February 7, 2009

Report to The Secretary Of The Treasury from The Treasury Borrowing Advisory Committee of The Securities Industry and Financial Markets Association
Keith T. Anderson, Chairman; Rick Rieder, Vice Chairman, US Treasury, November 4, 2008


One Response to He Who Owns the Mortgage Owns the House

  1. […] Thanks to Unconventional Notions for this Excellent ping back and follow up to my earlier post: He Who Owns the Mortgage Owns the House.  You can get a nice slice of history circa 1956 when the U.S. used it’s large position in […]

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