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Thursday, October 13, 2022 02:14 PM | InvestorsObserver Analyst
A U.S. Treasury report released this week brought dismal economic news when it was revealed that the gross national debt had surpassed $31 trillion for the first time ever.
The new total equates to more than $93,000 of debt for every U.S. citizen.
While many economists have agreed that the whopping national debt load has the potential to restrain private growth in the long-term, some American leaders have claimed the debt poses a national security risk.
Whatever the potential effects of the growing national debt, it's clear that the total is rising at a faster rate than any experts could have predicted.
For perspective, 200 years elapsed before the U.S. accumulated its first trillion in national debt, but since the Covid-19 related lockdowns U.S. debt has grown by more than $1 trillion each quarter.
The Debt Process
While economists disagree as to how to solve the present debt crisis, the cause of the nation's rising debt is straightforward. When the government spends more money in a fiscal year than it takes in, an annual deficit ensues.
In order to pay for the remaining amount of items in the federal budget and cover the deficit, the U.S. issues Treasury bills, notes, and bonds that can be bought by investors.
It can be helpful to think of the national debt as thetotal amount of money a country owes creditors.
Who Owns the Debt?
The national debt can be split into two different types:intragovernmental holdings and debt held by the public.
Intragovernmental Debt
Intragovernmental debt is what the Treasury Department, which manages the national debt, owes to other governmental agencies. This debt can also be thought of as what the U.S. owes to itself.
This occurs when some agencies, like the Social Security Trust Fund, take in more revenue from taxes than they need. Instead of letting these excess funds sit on their balance sheets, these agencies invest in U.S. Treasury notes, where their money is spent to maintain the debt and earns interest.
Currently, intragovernmental debt accounts for about $6.8 trillion of the debt.
Debt Owned by the Public
According to theTreasury Department, public debt is "held by any person or entity that is not a U.S. federal government agency." This can include include corporations, domestic individual investors, local or state governments, and most notably foreign governments.
Currently, the public holds more than $24.29 trillion of the national debt.
Foreign Countries
It's important to remember that anyone can buy U.S. debt, and treasury securities are freely traded around the world. As of July of 2022, a third of U.S. public debt is held by central banks and foreign investors, amounting to around $7.7 trillion.
Japan ($1.2 trillion)
Although it's widely believed that China is the largest foreign holder of U.S. debt, the top spot actually goes to Japan, a major exporter with the third largest GDP in the world.
Japan has long been one of the key U.S. allies in the Pacific, and the U.S. government has signed a number of trade deals over the years that have given the island nation preferential access to U.S. markets.
Like the U.S., Japan also has a massive amount of national debt, representing a mind-blowing 236% of its GDP (U.S. debt equates to 107.6% debt-to-GDP).
However, Japan owes only 10% of its debt to foreign governments, unlike the U.S. which currently owes 33% of the public portion of the debt to foreign creditors.
Why Does Japan Buy U.S. Debt?
Because Japan exports so many goods to the U.S. and other nations, the country frequently develops an account surplus in dollars - the currency the U.S. and other countries give Japan in exchange for their products.
Normally, Japan would want to immediately exchange those dollars into yen, their national currency, so companies can pay workers and conduct internal transactions.
But if they dump these excess dollars into foreign exchange market, yen would naturally appreciate and Japanese exporters would lose their competitive edge.
To counter this effect, the bank of Japan buys the dollars from Japanese companies and keep them in the form of US Treasurys as their reserve, maintaining a lower value for the yen.
China ($970 billion)
In recent years, China has received outsized attention for the amount of U.S. debt that it owns. Although many analysts have chalked up China's policy of buying American debt to its desire to control Washington, the true reason is likely less insidious.
Like Japan, China is a major net exporter to the U.S. and wants to keep the value of the dollar higher than the value of its own currency, the yuan. This helps to keep China's exports to the U.S. affordable, more competitive in foreign markets, and helps its economy grow.
However, the percentage of the national debt that China holds has been shrinking in recent years. In one period, from November 2021 to July 2022, the country's debt ownership dropped by nearly $100 billion to $970 billion.
This partly has to do with China's shrinking trade deficit, meaning it has fewer dollars to recycle into Treasury notes.
Would China Consider Offloading U.S. Debt?
Given China's rocky relationship with the U.S., some experts fear that China could economically injure the U.S. by selling off its debt securities, a move that would result in higher interest rates and a devaluation of the dollar.
This is unlikely to happen since, if China were to dump its treasury holdings, the demand for the dollar could plummet, yield China a low value in the sale. Additionally, the resulting dollar collapse could disrupt international markets even more than the 2008 financial crisis. China's economy would suffer along with everyone else's.
Britain ($634 billion)
Coming in at third on the list is the United Kingdom, a country that boasts the sixth-largest economy in the world. The UK has made significant investments in U.S. national debt in the last year, with the country's total ownership rising from $540 billion in July 2021 to $634 billion in August 2022.
The U.K.'s investment in U.S. debt may be linked to growing economic uncertainty as its recovers from the effects of the Covid-19, as well as the loss of various trading relationships due to Brexit.
As one of the United States's main allies, the UK may make a more concerted effort to buy U.S. Treasurys going forward due to the perceived safety of Treasury bonds.
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As an expert with a demonstrable understanding of economic concepts and global financial dynamics, I can provide insights into the key elements mentioned in the article regarding the U.S. national debt. My expertise is grounded in a deep understanding of economic principles, financial markets, and global trade dynamics.
First and foremost, the article discusses the U.S. national debt surpassing $31 trillion, with implications for both the economy and national security. The rapid increase in debt, particularly since the Covid-19-related lockdowns, is a crucial point. Historically, it took 200 years for the U.S. to accumulate its first trillion in national debt, highlighting the unprecedented nature of the current situation.
The debt process is explained, emphasizing that when the government spends more than it takes in during a fiscal year, it results in an annual deficit. To cover this deficit and fund the remaining items in the federal budget, the U.S. issues Treasury bills, notes, and bonds, which are bought by investors.
The breakdown of the national debt into two types—intragovernmental holdings and debt held by the public—is a fundamental concept. Intragovernmental debt represents what the U.S. government owes to other governmental agencies, essentially a form of debt owed to itself. Currently, intragovernmental debt accounts for about $6.8 trillion of the total debt. On the other hand, public debt, amounting to more than $24.29 trillion, is held by entities outside the U.S. federal government, including corporations, individual investors, and foreign governments.
The article sheds light on the ownership of the U.S. debt by foreign countries, with Japan being the largest holder at $1.2 trillion. Japan's unique position in buying U.S. debt is explained by its trade surplus with the U.S. and the need to maintain a competitive edge in global markets. The discussion also dispels the common belief that China is the largest foreign holder, as Japan holds the top spot.
China's role in holding U.S. debt is explored, emphasizing its desire to keep the value of the dollar higher than its own currency, the yuan, to support its exports. The article provides insight into the potential consequences if China were to offload U.S. debt, including higher interest rates and a devaluation of the dollar, although such a scenario is considered unlikely due to its negative impact on China's own economy.
Lastly, the article mentions the United Kingdom as the third-largest foreign holder of U.S. debt at $634 billion. The UK's increased investment in U.S. debt is attributed to economic uncertainty following the effects of Covid-19 and Brexit, as well as the perceived safety of U.S. Treasury bonds.
In summary, my expertise allows me to provide a comprehensive understanding of the economic concepts discussed in the article, ranging from the U.S. national debt dynamics to the role of foreign countries in holding that debt and the potential implications for the global economy.
