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Want to invest in U.S. Treasury notes? Step right up, alongside China, Japan, the United Kingdom and the rest of the world.
While a sign of faith in the stability of the U.S. dollar, all this money from foreigners also worries some people. They say the nearly $4 trillion worth of U.S. government securities held by foreign investors shows how deeply our government must borrow to sustain itself – and if the foreign investors want out, they could harm our economy.
U.S. Sen. George Voinovich of Ohio is among the worriers, and he blames this government’s inability to stop spending. As he said on the floor of the Senate on July 14, "Last year, we borrowed $1.4 trillion -- or 41 cents of every dollar we spent. Over half of this debt is held by foreign investors."
Has the share of debt to foreigners really gotten that big? If you use a widely accepted estimate agreed to by economists, yes.
How worrisome that is, and why, is another matter.
The debt to which he refers is not just from last year’s $1.4 trillion budget deficit. The debt is the total of all outstanding borrowing. Think of it like a 30-year home mortgage of $150,000 and a home equity loan of $25,000. The total debt would be $175,000 plus interest, even if only $1,200 a month, or $14,400, was due this year.
Total U.S. government debt as of July 30 was nearly $13.25 trillion, according to the Treasury Department.
But about $4.5 trillion of that debt is what’s called "intragovernmental holdings" -- money loaned from one government agency to another. This includes money that the Social Security trust fund loaned to the Treasury for general government operations that eventually will have to be repaid.
Economists often exclude intragovernmental holdings when discussing the public debt, because their bigger concern is the other portion -- $8.7 trillion – that will have to be repaid to outside parties. The government gets that money from investors -- individuals, companies, mutual funds and foreign countries -- in exchange for interest-bearing bills, notes and bonds from the Treasurery Department.
This "Debt Held By the Public" is what Voinovich was referring to when he said that "over half this debt is held by foreign investors."
So how is his math?
If you want precision, it’ll depend on which report you are examining. According to Treasury Department information that is updated monthly, foreigners held $3.96 trillion in U.S. Treasury securities at the end of May (the most recent month reported). The total debt to the public was nearly $8.5 trillion. So foreign ownership of U.S. debt equaled 47 percent if you use the May data.
Voinovich’s aides said the senator used slightly different numbers from a quarterly Treasury report from the end of March. It listed foreign and international ownership of U.S. Treasury securities at $3.88 trillion. At the time, total public debt was listed as $7.5 trillion. That meant 52 percent of the public debt was held by foreign investors.
Given the daily swings in market valuation and debt, changes in foreign countries’ investments, and even small changes in the way that different Treasury documents account for holdings, it makes little difference if the right figure is 47 percent of 52 percent. Voinovich is basically correct.
Likewise, even though Voinovich’s claim excluded the portion of national debt that comprises intragovernmental holdings, economists say his framework is widely accepted.
"I don’t think he was straying from conventional usage in saying that," said Andrew Biggs, a resident scholar at the conservative-leaning American Enterprise Institute.
Where are these foreign investors from? China represented 22 percent of the foreign holders at the end of May, with $867.7 billion, followed by Japan ($786.7 billion, or 20 percent), the United Kingdom ($350 billion, or 9 percent) and oil exporting countries ($235.1 billion, or 6 percent).
Economists and politicians sometimes dispute what would happen if these investors suddenly cashed in their investments. Theoretically it could harm the value of the U.S. dollar, require higher interest rates to attract new investors, lead to high inflation and drive up the cost of consumer goods for Americans..
But that could hurt the value of their investments in a sell-off. And a weaker American dollar would make American goods more affordable overseas while foreign goods got more expensive here. That’s not what countries selling to American consumers want, economists say.
That doesn’t mean the current level of debt is insignificant, and the subject consumes a great deal of this year’s political debate. The foreign-ownership component leaves a number if "what-ifs" on which people disagree.
But we found that Voinovich’s numbers are basically sound, and economists we talked to agreed it’s fine for Voinovich to cite only the publicly held debt for his comparison.
We rate Voinovich’s claim that half the national debt is held by foreign investors as True.
Sen. George Voinovich, testimony, Homeland Security and Government Affairs Committee, 12/17/2009
Sen. George Voinovich, speech in the U.S. Senate, 7/14/2010
Congressional Budget Office, "An Analysis of the President’s Budgetary Proposals for Fiscal Year 2011"
U.S. Treasury Department’s "Debt to the Penny" website
U.S. Treasury Department, Profile of the Economy, Bulletin from June 2010
Treasury Department "International Capital System" statistical report,
Telephone and e-mail discussions with aides to Sen. George Voinovich, July 27-28, 2010
Telephone interview with Andrew Biggs, American Enterprise Institute, July 28,2010
Telephone interview with Mark Weisbrot, Center for Economic and Policy Research, July 28,2010
Congressional Budget Office, "Federal Debt and the Risk of a Fiscal Crisis," July 27,2010
New York Times, "China’s role as lender alters Obama’s visit," Dec. 15, 2009
Associated Press, "Foreign-held U.S. debt rises to almost $4T," June 15,2010
The Skeptical Optimist, "What's so scary about 'Debt held by foreigners"
James A. Dorn, "The debt Threat - a risk to U.S.-China relations," Brown Journal of World Affairs, Spring/Summer 2008
CNBC, interview with Julian Roberson, Tiger management Founder and CEO, Sept., 24, 2009
Report from the Federal Reserve Bank of St. Louis,
The Washington Post, "Federal budget deficit to exceed $1.4 trillion in 2010 and 2011," July 23, 2010
The New York Times, "U.S. Agency trims estimate of the deficit" July 23, 2010
Statement from Republican leadership on debt, 7/23/2010
U.S. Federal Reserve, Monetary Policy Report to Congress, 7/21/2010
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