Many worry that China’s ownership of American debt affords the Chinese economic leverage over the United States. This apprehension, however, stems from a misunderstanding of sovereign debt and of how states derive power from their economic relations. The purchasing of sovereign debt by foreign countries is a normal transaction that helps maintain openness in the global economy. Consequently, China’s stake in America’s debt has more of a binding than dividing effect on bilateral relations between the two countries.
Even if China wished to “call in” its loans, the use of credit as a coercive measure is complicated and often heavily constrained. A creditor can only dictate terms for the debtor country if that debtor has no other options. In the case of the United States, American debt is a widely-held and extremely desirable asset in the global economy. Whatever debt China does sell is simply purchased by other countries. For instance, in August 2015 China reduced its holdings of U.S. Treasuries by approximately $180 billion. Despite the scale, this selloff did not significantly affect the U.S. economy, thereby limiting the impact that such an action may have on U.S. decision-making.
Holders of U.S. Debt
Furthermore, China needs to maintain significant reserves of U.S. debt to manage the exchange rate of the renminbi. Were China to suddenly unload its reserve holdings, its currency’s exchange rate would rise, making Chinese exports more expensive in foreign markets. As such, China’s holdings of American debt do not provide China with undue economic influence over the United States.
Why do countries accumulate foreign exchange reserves?
Any country that trades openly with other countries is likely to buy foreign sovereign debt. In terms of economic policy, a country can have any two but not three of the following: a fixed exchange rate, an independent monetary policy, and free capital flows. Foreign sovereign debt provide countries with a means to pursue their economic objectives.
The first two functions are monetary policy choices performed by a country’s central bank. First, sovereign debt frequently comprises part of other countries’ foreign exchange reserves. Second, central banks buy sovereign debt as part of monetary policy to maintain the exchange rate or forestall economic instability. Third, as a low-risk store of value, sovereign debt is attractive to central banks and other financial actors alike. Each of these functions will be discussed briefly.
Foreign Reserves
Any country open to international trade or investment requires a certain amount of foreign currency on hand to pay for foreign goods or investments abroad. As a result, many countries keep foreign currency in reserve to pay for these expenses, which cushion the economy from sudden changes in international investment. Domestic economic policies often require central banks to maintain a reserve adequacy ratio of foreign exchange and other reserves forshort-term external debt, and to ensure a country’s ability to service its external short-term debt in a crisis. The International Monetary Fund publishes guidelines to assist governments in calculating appropriate levels of foreign exchange reserves given their economic conditions.
Exchange rate
A fixed or pegged exchange rate is a monetary policy decision. This decision attempts to minimize the price instability that accompanies volatile capital flows. Such conditions are especially apparent in emerging markets: Argentinian import price increases of up to 30 percent in 2013 led opposition leaders to describe wages as “water running through your fingers.” Since price volatility is economically and politically destabilizing, policymakers manage exchange rates to mitigate change. Internationally, few countries’ exchange rates are completely “floating,” or determined by currency markets. To manage domestic currency rates, a country might choose to purchase foreign assets and store them for the future, when the currency might depreciate too quickly.
As sovereign debt is government-backed, private and public financial institutions view it as a low-risk asset with a high chance of repayment. Some government bonds are seen as riskier than others. A country’s external debt may be viewed as unsustainable relative to its GDP or its reserves, or a country could otherwise default on its debt. Generally, however, sovereign debt is more likely to return value and therefore is safer relative to other forms of investment, even if earned interest is not high.
Why does China buy U.S. debt?
China buys U.S. debt for the same reasons other countries buy U.S. debt, with two caveats. The crippling 1997 Asian Financial Crisis prompted Asian economies, including China, to build up foreign exchange reserves as a safety net. More specifically, China holds large exchange reserves, which were built up over time due in part to persistent surpluses in the current account, to inhibit cash inflows from trade and investment from destabilizing the domestic economy.
China’s large U.S. Treasury holdings say as much about U.S. power in the global economy as any particularity of the Chinese economy. Broadly speaking, U.S. debt is an in-demand asset. It is safe and convenient. As the world’s reserve currency, the U.S. dollar is extensively used in international transactions. Trade goods are priced in dollars and due to its high demand, the dollar can easily be cashed in. Furthermore, the U.S. government has never defaulted on its debt.
Despite U.S. debt’s attractive qualities, continued U.S. debt financing has concerned economists, who worry that a sudden stop in capital flows to the United States could spark a domestic crisis.1 Thus, U.S. reliance on debt financing would present challenges—not if demand from China were halted, but if demand from all financial actors suddenly halted.2
From a regional perspective, Asian countries hold an unusually large amount of U.S. debt in response to the 1997 Asian Financial Crisis. During the Asian Financial Crisis, Indonesia, Korea, Malaysia, the Philippines, and Thailand saw incoming investments crash to an estimated -$12.1 billion from $93 billion, or 11 percent of their combined pre-crisis GDP.3 In response, China, Japan, Korea, and Southeast Asian nations maintain large precautionary rainy-day funds of foreign exchange reserves, which—for safety and convenience—include U.S. debt. These policies were vindicated post-2008, when Asian economies boasted a relatively speedy recovery.
From a national perspective, China buys U.S. debt due to its complex financial system. The central bank must purchase U.S. Treasuries and other foreign assets to keep cash inflows from causing inflation. In the case of China, this phenomenon is unusual. A country like China, which saves more than it invests domestically, is typically an international lender.4
To avoid inflation, the Chinese central bank removes this incoming foreign currency by purchasing foreign assets—including U.S. Treasury bonds—in a process called “sterilization.” This system has the disadvantage of generating unnecessarily low returns on investment: by relying on FDI, Chinese firms borrow from abroad at high interest rates, while China continues to lend to foreign entities at low interest rates.5 This system also compels China to purchase foreign assets, including safe, convenient U.S. debt.
Who owns the most U.S. debt?
Around 70 percent of U.S. debt is held by domestic financial actors and institutions in the United States. U.S. Treasuries represent a convenient, liquid, low-risk store of value. These qualities make it attractive to diverse financial actors, from central banks looking to hold money in reserve to private investors seeking a low-risk asset in a portfolio.
Of all U.S. domestic public actors, intragovernmental holdings, including Social Security, hold over a third of U.S. Treasury securities.The secretary of the treasury is legally required to invest Social Security tax revenues in U.S.-issued or guaranteed securities, stored in trust funds managed by the Treasury Department.
The Federal Reserve holds the second-largest share of U.S. Treasuries, about 13percent of total U.S. Treasury bills. Why would a country buy its own debt? As the U.S. central bank, the Federal Reserve must adjust the amount of money in circulation to suit the economic environment. The central bank performs this function via open market operations—buying and selling financial assets, like Treasury bills, to add or remove money from the economy. By buying assets from banks, the Federal Reserve places new money in circulation in order to allow banks to lend more, spur business, and help economic recovery.
Excluding the Federal Reserve and Social Security, a number of other U.S. financial actors hold U.S. Treasury securities. These financial actors include state and local governments, mutual funds, insurance companies, public and private pensions, and U.S. banks. Generally speaking, they will hold U.S. Treasury securities as a low-risk asset.
The biggest effect of a broad scale dump of US Treasuries by China would be that China would actually export fewer goods to the United States.
– Scott Miller
Overall, foreign countries each make up a relatively small proportion of U.S. debt-holders. AlthoughChina’s holdings have represented just under20 percent of foreign-owned U.S. debt in the past several years, this percentage only comprises between 5 and 7 percent of total U.S. debt. China’s holdings fell to $1.05 trillion in November 2016, marking the lowest level since 2010. Moreover, Japan has at times overtaken China as the largest foreign holder of U.S. debt. This has been the case since June 2019, as China’s holdings have fallen and Japan’s have risen.
Internationally, this situation is common: most sovereign debt is held domestically. European financial institutions hold the majority of European sovereign bonds. Similarly, Japanese domestic financial actors hold approximately 90 percent of Japanese net sovereign debt. Thus despite international demand for U.S. sovereign debt, the United States is no exception to the global trend: U.S. domestic actors hold the majority of U.S. sovereign bonds.
If the China bloc disposes of net foreign assets amounting to more than 20% of GDP by offloading US bloc bonds over 10 years, the IMF finds that the China bloc's domestic interest rates would fall by four basis points.
China and Japan are the largest foreign investors in American government debt. Together they own $2 trillion — more than a quarter — of the $7.6 trillion in US Treasury securities held by foreign countries.
Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a dropoff in consumer confidence that could shock the United States' financial market and tip its economy—and the world's—into immediate recession.
Investors in Japan and China hold significant shares of U.S. public debt. Together, as of September 2022, they accounted for nearly $2 trillion, or about 8 percent of DHBP. While China's holdings of U.S. debt have declined over the past decade, Japan has slightly increased their purchases of U.S. Treasury securities.
With $1.1 trillion in Treasury holdings, Japan is the largest foreign holder of U.S. debt. Japan surpassed China as the top holder in 2019 as China shed over $250 billion, or 30% of its holdings in four years. This bond offloading by China is the one way the country can manage the yuan's exchange rate.
According to usafacts.org, as of January 2023, Japan owned $1.1 trillion in US Treasuries, making it the largest foreign holder of the national debt. The second-largest holder is China, which owned $859 billion of US debt.
At the end of 2021, of the 98 countries for whom data was available, Pakistan ($27.4 billion of external debt to China), Angola (22.0 billion), Ethiopia (7.4 billion), Kenya (7.4 billion) and Sri Lanka (7.2 billion) held the biggest debts to China.
Its debt, long viewed as an ultra-safe asset, is a foundation of global commerce, built on decades of trust in the United States. A default could shatter the $24 trillion market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.
U.S. debt to China comes in the form of U.S. Treasuries, largely due to their safety and stability. Although there are worries about China selling off U.S. debt, which would hamper economic growth, doing so in large amounts poses risks for China as well, making it unlikely to happen.
Rising debt means fewer economic opportunities for Americans. Rising debt reduces business investment and slows economic growth. It also increases expectations of higher rates of inflation and erosion of confidence in the U.S. dollar.
The federal government borrows money from the public by issuing securities—bills, notes, and bonds—through the Treasury. Treasury securities are attractive to investors because they are: Backed by the full faith and credit of the United States government.
As of January 2023, the five countries owning the most US debt are Japan ($1.1 trillion), China ($859 billion), the United Kingdom ($668 billion), Belgium ($331 billion), and Luxembourg ($318 billion).
As of September 30, 2022: More than three-fourths of the federal government's total assets ($5.0 trillion) consist of: 1) $877.8 billion in cash and monetary assets; 2) $406.9 billion in inventory and related property; 3) $1.4 trillion in net loans receivable (primarily student loans); and 4) $1.2 trillion in net PP&E.
Flashpoints that greatly contributed to the debt over the past 50 years include the wars in Iraq and Afghanistan, the 2008 financial crisis and the 2020 COVID-19 pandemic -- the latter two prompting sweeping stimulus measures from Congress that cost trillions of dollars.
This resulted in a huge government surplus of funds. (In 1835, the $17.9 million budget surplus was greater than the total government expenses for that year.) By January of 1835, for the first and only time, all of the government's interest-bearing debt was paid off.
To pay back one million dollars, at a rate of one dollar per second, would take you 11.5 days. To pay back one billion dollars, at a rate of one dollar per second, would take you 32 years. To pay back one trillion dollars, at a rate of one dollar per second, would take you 31,688 years.
At the end of 2021, of the 98 countries for whom data was available, Pakistan ($27.4bn of external debt to China), Angola (22.0bn), Ethiopia (7.4bn), Kenya (7.4bn) and Sri Lanka (7.2bn) held the biggest debts to China.
China loaned a total of $143 billion to African governments and state-owned enterprises between 2000 and 2017. In 2020, the African countries with the largest Chinese debt were Angola ($25 billion), Ethiopia ($13.5 billion), Zambia ($7.4 billion), the Republic of the Congo ($7.3 billion), and Sudan ($6.4 billion).
'Catastrophe' A default on U.S. debt could trigger a worldwide recession and upend stock markets in addition to wreaking havoc in Americans' financial lives.
The initial jobs losses that result from a potential debt ceiling breach will center in the construction and manufacturing sectors, Michelle Holder, a labor economist at John Jay College of Criminal Justice, told ABC News.
The US doesn't actually have to pay off its $31 trillion mountain of debt, according to top economist Paul Krugman, hitting back at the idea that government finances can be compared to household balance sheets in an op-ed weeks before the US possibly defaults on some obligations.
Even so, in April 1938, the Nationalist government of China began to issue U.S.-dollar denominated bonds to finance the war against Japan's brutal invasion. Locked in a pitched battle for survival, the government issued these bonds into 1940.
At 79 percent of GDP, our federal debt is at its highest point since just after World War II. Unfortunately, the even more depressing fiscal fact is that our debt is projected to nearly triple over the next 30 years to more than twice the size of the U.S. economy.
What percentage of America is debt-free? According to that same Experian study, less than 25% of American households are debt-free. This figure may be small for a variety of reasons, particularly because of the high number of home mortgages and auto loans many Americans have.
Of course, just as with an individual or family, cutting spending and increasing revenue are smart first steps. Beyond that, the government considers things like new taxes, a higher retirement age, removing loopholes from the tax code, and more to reduce annual deficits and the national debt.
“Next time a Republican tells you that 'Social Security is broke,' remind them that Pres. Bush 'borrowed' $1.37 trillion of Social Security surplus revenue to pay for his tax cuts for the rich and his war in Iraq and never paid it back”.
407, 652(b), 659 and 662(f)) LEVY AND GARNISHMENT OF BENEFITS. Generally, Social Security benefits are exempt from execution, levy, attachment, garnishment, or other legal process, or from the operation of any bankruptcy or insolvency law.
To acquire the full amount, you need to maximize your working life and begin collecting your check until age 70. Another way to maximize your check is by asking for a raise every two or three years. Moving companies throughout your career is another way to prove your worth, and generate more money.
The average U.S. household has $6,473 in credit card debt
According to data from Experian, the average American's credit card balance in the third quarter of 2021 was $5,221. The Ascent examined research on American credit card debt and found that Americans had $841 billion in credit card debt in 2022.
The case of debts arising from World War II is somewhat less complicated. At this time only four countries, discussed below, owe the U.S. government debts of any size arising from World War II programs to aid our allies. Other countries have paid their debts in full.
Of the total 7.4 trillion held by foreign countries, Japan and Mainland China held the greatest portions, with China holding 859.4 billion U.S. dollars in U.S. securities. Other foreign holders included oil exporting countries and Caribbean banking centers.
$2,202 billion at market value), and about 2% higher for the federal government ($1,246 billion at book value vs. $1,227 billion at market value.) Government debt for fiscal year 2021. Notes: Data are for 2021 (the fiscal year ending 31 March 2022).
Investors in Japan and China hold significant shares of U.S. public debt. Together, as of September 2022, they accounted for nearly $2 trillion, or about 8 percent of DHBP. While China's holdings of U.S. debt have declined over the past decade, Japan has slightly increased their purchases of U.S. Treasury securities.
United States - Federal Government; Net Worth (IMA), Level was -20997153.00000 Mil.of $ in July of 2022, according to the United States Federal Reserve.
The average American savings account balance is $4,500. Between 1959-2022, the average U.S. savings rate has been 8.96%. The average household savings rate in the U.S. was only 5.1% in the second half of 2022. In total, gross personal savings in the U.S. is worth $2.3 trillion.
In sum, slavery and conquest created the foundation upon which the U.S. economy grew. By 1900, America had surpassed England in total economic output, forming a key component of the world system.
What will happen to Chinese holdings of the U.S. treasuries if Chinese authorities decide to let the yuan float freely as of today? Chinese holdings of U.S. treasuries will remain unchanged at the current level.
“[The US data] shows that Chinese investors have indeed shown a tendency to accelerate the reduction of US treasury bonds in 2022,” Zhang said in an article published earlier this month.
In late 2008 and 2009, China sold Agencies and the Fed stepped in and bought them. Then in 2022, the Fed stopped buying Agencies and now is letting its portfolio run down—and China is buying many of them.
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