Subsidizing U.S. Borrowing & Spending

Over half of all U.S. Treasury debt is now held by overseas owners. If that makes you uncomfortable, you are not alone.

For most of recent history, foreigners holding US debt has been 20% or less. The shift began under Bill Clinton, starting around 1993, and accelerated into ’94-95. When Clinton finished his 2nd term, foreign ownership of US Treasuries was about 35%.

That ownership has continued to rise under President Bush, and now stands at 52%.

I find rather interesting the general reaction to this; Perhaps 50% represents a tipping point of sorts, but I suspect the main difference on this score between the present and past perception of this is the context:

When Clinton was in office, the economy was in full throated boom. (Who gets the credit for that, as well as the blame for the subsequent collapse is a discussion best saved for another time, but suffice it to say there’s plenty of both to spread around). The two party system forced mutual compromises and the pragmatic centrists had the last laugh: The national deficit was being reduced, a budget surplus was accumulating, the nation was at peace, and the Boomer retirement was decades away. The US was seen not just as a safe haven, but a vibrant and growing economic powerhouse.   

Either no one noticed or no one cared that foreign ownership of US Debt was increasing. I certainly do not remember it getting much ink.

The context at present is very different. Alas, all expansions are followed by contractions. As so often happens, the Boom ended in a Bust; Not one but two wars were prosecuted (one clearly necessary, the 2nd, less so). On top of several national emergencies that ratcheted up spending (9/11, Katrina), we have seen runaway ordinary spending from the Federal government. One party rule — no matter which party — causes profligate wasting of OPM, and the present group of spendthrifts are no different. Surprisingly, the President has never vetoed a spending bill.

The main purchasers of US Treasuries today are the sellers of low cost goods who are on the recieving end of our enormous balance of trade deficit. They are awash in dollars, and have few other places to send them. Besides, ppurchasing US Treasuries helps to keep US interest rates low, which allows credit dependent US  Consumers to in turn keep buying their stuff.   

So while the increases in foreign ownership are similar (percentage or dollar wise) the context is very very different.

click for larger graphic 


chart courtesy of NYT

Here’s the Ubiq-cerpt:™

"Since the end of 2000, as George W. Bush was preparing to take office, federal debt is up by $1.1 trillion. American investors, as a group, have lent not one penny of that. They have, instead, been net sellers of Treasury securities.

The latest numbers on just who buys and owns Treasury debt, released in late September, showed that foreign investors and central banks have increased their holdings of Treasuries by $1 trillion since Mr. Bush took office. Another $213 billion was bought by the Federal Reserve.

That record stands in stark contrast to the deficit-spending president to whom Mr. Bush is often compared – Ronald Reagan. Reagan still holds the record for largest dollar increase in federal debt, $1.4 trillion. But it took him eight years to accomplish that, in contrast with Mr. Bush’s four-and-a-half years.

During the Reagan years, overseas investors were willing to take up only about a sixth of the new debt. When Reagan took office, foreigners were owed 21 percent of the national debt, excluding the share owed to the Federal Reserve. By the time he left office, that figure was down to 19 percent. It held steady under President George H. W. Bush, but began to rise under President Bill Clinton, when overseas investors bought more Treasuries than were issued. By the time he left office, the percentage was up to 36 percent. Now it is 54 percent.

As the foreigners signed up to buy, many Americans bailed out. American banks and insurance companies, which collectively owned more than 40 percent of Treasuries when Dwight D. Eisenhower was president, now own less than 8 percent.

While Mr. Bush seems certain to set a record for biggest dollar increase in debt under one president, by other measures this has not been a particularly profligate administration. Net debt has risen at an annual rate of 6.4 percent under President Bush. That is far higher than the 0.4 percent rate under his predecessor, Bill Clinton, but it is below the rate of all presidents from Gerald R. Ford to George H. W. Bush."



More Than Ever, the U.S. Spends and the Foreigners Lend
NYT, October 1, 2005

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What's been said:

Discussions found on the web:
  1. cam from Hulver’s site commented on Oct 1

    US Treasury Debt

    Foreign holdings of US debt is over 50% now. There seems to be a general feeling that this is bad, but there hasn’t been much comment on why.
    From the article;
    Over half of all U.S. Treasury debt is now held by overseas owners. If that make…

  2. wcw commented on Oct 1

    Seems to me that in an even vaguely globalized world, debtholding should roughly follow GDP. US GDP is under a quarter of world GDP, so three-quarters of Treasury debt should be held by foreigners.

    Yes, yes, this discounts currency preference and a host of other things. In the ideal case, though, I believe it’s true. While you want to adjust that 75% down to compensate, I don’t see the point of 0%.

  3. jj commented on Oct 1

    the foreign ownership data should be broken down by country to appreciate the true picture….I’d suspect that one of the reasons behind the increasing foreign ownership is the use of offshore entities to hold assets.

    So if the data indicates a surge in ownership from entities in the Cayman Islands, Bermuda, etc…..that would be less worrisome that ownership in Japan, China, UK, etc.

  4. Barry Ritholtz commented on Oct 1

    WCW: Your math makes no sense — if U.S GDP is one quarter of the world’s GDP, how do you reach the conclusion that the world should hold 3 quarters of GDP debt?

    What’s the basis?

  5. Blackwood commented on Oct 1

    The reason why US investors have dumped Treasuries is because THE RETURN SUCKS. Who the hell was buying T-bills when they were returning 1%, and what drugs were they on?

    The foreign investment is not so much making money on the return, but on the currency exchange. They’re betting on their local currencies to fall compared to the dollar.

    And really, given the suck returns worldwide, where else are you going to put cash to keep it safe? Australian bonds? Germany? They all even less stable and with an even lower interest rate.

    And then there’s friggin China, which has had so much corruption and scams around it’s bond issues that they’re a worldwide joke. Things are so bad with outright fraud that they’ve been forced to do a pass-through scheme where they issued Chinese bonds that were then used to buy… US treasuries. Why international investors would do this instead of just buying US treasuries directly is puzzling, but it’s a fact that part of China’s ownership of US treasuries is in fact as a sham middleman holding the assets for the usual european investors.

  6. Jill commented on Oct 1

    Where does the figure 1.1 trillion come from? In September of 2000, three months before Bush became President the debt stood at
    5,674,178,209,886.86. The current debt is presently 7,914,012,303,376.60. The House recently voted to increase the debt by $800.000,000. So I would say that the debt has increased about 2.3 trillion. Are they not counting the intragovernmental holdings? Why not? Congress has spent every dime from each and every trust. Thats why they are included in the debt.

  7. Justice Litle commented on Oct 1

    #1 and #2 are Japan and China, with Japan far in the lead. The single largest group of overseas US treasury holders is Japanese consumers. They have had nowhere else to go with a moribund domestic economy and interest rates near zero. That is now changing as long overdue reforms appear to be taking hold. The Nikkei chart tells the story: If the Koizumi revival sticks and the BoJ finally starts raising rates at home with a domestic recovery under way, it will be Sayonara for US treasuries.

    #2 China buys US treasuries as a place to stash the excess dollars that are piling up via China / US trade. US consumers import mountains of ‘stuff’ on credit and China provides the vendor financing. If the RMB were allowed to float, this inflow of dollars would cause China’s currency to rise. But since China (and much of Asia) intentionally keeps their currencies undervalued in an effort to keep exports cheap, the natural adjustment doesn’t happen and the dollars pile up.

    Having nowhere useful else to put them, Asian central bankers buy up US treasuries (dollar-denominated assets) with this growing pile of dollars as a last-resort option. This buying in turn keeps long term rates low, which creates an apparently virtuous circle of US spending and Asian growth that will undoubtedly turn vicious. When the US consumer taps out, foreign treasury purchases may slow and even reverse with frightening rapidity.

    Ol’ Ben Bernanke blames the imbalance on the ‘global savings glut’, but it’s really the fault of two parties: profligate US spending and mercantilist Asian policies coming together like a poison Reese’s Pieces. The drug is cheap credit; consumers are the addicts; Asia is the supplier; Greenspan & co. are the increasingly reluctant dealers.

    We are headed for cold turkey withdrawal.

  8. royce commented on Oct 1

    I can see why the Chinese and others want to buy treasuries, and I can see why carrying a huge government debt is bad. But why is it necessarily better for the U.S. if the loans were to come from U.S. citizens instead of foreigners?

  9. calmo commented on Oct 1

    “But why is it necessarily better for the U.S. if the loans were to come from U.S. citizens instead of foreigners?”
    Well, it might be more comfortable knowing that our lifestyle is not so dependent on the kindness of strangers –foreign strangers.
    But I think we’re past that now, both us and them. We are less xenophobic and they are looking at other investments, no? The CB support for the tbills has subsided somewhat and private investors ( although could still be China setser argues) have taken up the slack. Why would private investors buy tbills when there are other attractive choices? For reasons apparent to them obviously, who may have reasons for concealing that information from the general public. Hedge Funds are like that: they mind their own business. How long can they keep it up? (The Saudi’s might be able to go as long as the oil price doesn’t drop, but the others?) The Carrib strikes me as the key player to watch in tbill transactions.

  10. Justice Litle commented on Oct 1

    It’s a chicken and egg thing. Without massive inflows of price-insensitive foreign capital, long term interest rates would never have stayed so low for so long in the first place.

    Since the real estate bubble, er, boom has primarily been a function of low-cost financing, which in turn has been a function of persistently low long term rates, it stands to reason that without a fat pipeline of indiscriminate capital keeping those long term rates low, the US would never have borrowed so much in the first place.

    It’s not possible to imagine internal demand for the huge slug of US debt that exporting countries have been willing to shoulder on ‘easy payment terms.’ (Nor is it just Asia; cash-rich commodity producing countries are playing the vendor finance game as well.) We’re high on credit, they’re high on growth.

    Just my .02

  11. Danielle commented on Oct 1


    because if something happens to the value of their investments. They might not be happy and terrorize you.

  12. brad commented on Oct 1

    Going back to Barrys original point, the context certainly matters — in the late 90s, the us was paying down debt, so constant foreign holdings would still have resulted in foreigners holding a rising share of us debt. that is not the entire story, but it is part of the story. from 02 on, us debt levels have been rising, and basically all the treasury debt added to the market has ended up in foreign hands — so foreign investors hold a rising share of a rising stock.

    another factor — from 93-97, strong capital inflows to emerging economies fueled an increase in reserves, even tho most emerging economies back then spent rather than saved a decent share of the inflows. after 97, most emerging economies concluded that they needed to hold a higher level of reserves as a buffer v. sudden reversals in capital flows. fair enough. bernanke highlights this as well. that woud generate a one off increase in reserve levels and hence treasury holdings. but in my judgement, by 00 or 01, most emerging economies (particularly in asia) held all the reserves they needed. what has happened since then cannot primarily be explained as a legacy of the 97 crisis, but rather as the result of a conscious decision on the part of several key countries not to let their currencies appreciate v. the dollar once the dollar started to weaken …

  13. Norman commented on Oct 1

    This blog should conduct a two question poll: 1) Who is responsible for foreigners holding U.S. debt: A) The U.S. consumer for buying too much or, B) Foreign governments for promoting exports for dollars? 2) After receiving dollars for goods can these dollars or their purchase equivalent, U.S. Treasuries, ever disappear, ie be disolved into other currencies: A) Yes or, B) No.

  14. Danielle commented on Oct 2

    As far as I can see, we’re all in this together. We all want quality of life and for many people it means more material stuff and/or power. Each country tries to do the best it can with what it has.

    Then you can throw a couple of egomaniacs and megalomaniacs into the equation.

    I think the developed world is consuming too much, unsustainably raping the environment and I think Asia is producing too much. What is too much? Who knows! Can I prove it? Nope and that’s why we’re in this mess!

  15. Justice Litle commented on Oct 2

    Any of y’all seriously interested in the intersection of economics, morality and politics might enjoy “Crashmaker” by Victor Sperandeo.

    It’s basically a trader’s version of Atlas Shrugged, with a focus on Austrian Economics and the true meaning of constitutional government. (Seriously.) Available through

    p.s. I have no connection to Victor Sperandeo, other than being a fan…

  16. john commented on Oct 2

    “If you owe your bank a hundred pounds, you have a problem. But if you owe your bank a million pounds, it has.” – John Maynard Keynes

    “If you owe your bank a billion pounds everybody has a problem.” – The Economist

  17. European commented on Nov 28

    Foreign buy US denminated securities in order to keep their own economy stabile. This goes especially for the asian countries that are pegging their currency to the US dollar. In this way, asia is indirectly financing the us current acount deficit. As the article retoricaly ask us “does that make you uncomfortable”, there are big reasons to be uncomfortable.

    The reason why these countries have been buying us securities is because there have not been any good alternative to the dollar. However now that the Euro is in the picture, this might change.

    Put your self in the position of i.e China. You keep buying us treasuries, however the us dollar is constantly depreciating as a result of their trade policy (deficit problem) so your real gain from your investment will be less (or even negative) than the promised yield.
    This can go on for a while, but as any sound investor, if there are better oportrunities out there then you go for that. Here is where the Euro comes in. If the Euro continue its stabile path as it has done so far then china and other us dollar dependent countries might switch to the more sound and stabile Euro.

    If this happens, then the dollar is in BIG trouble. Who knows how much it will depreciate!! And what will be the external effects of this??

    Therefore there are big reasons to worry!!

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