While it is no secret that the U.S. is severely addicted to debt, what some may find surprising is that over half of all privately held U.S. public debt is held by foreigners. According to the International Monetary Fund, the United States accounted for 37.4 percent of the world’s imported foreign capital in 2012. As a nation living beyond its means, the U.S.’s reliance on foreign-held debt is hardly sustainable. Following the downgrade of the U.S.’s long-term sovereign credit by Standard and Poor’s in August 2011 from AAA to AA+ and the heated debate over raising the debt ceiling that followed soon after, both China and Japan — the first- and second-largest holders of American debt, respectively — expressed concern over the possibility that the U.S. may default on its debt obligations, while also raising questions about the long-term sustainability of America’s aggressive expansionary monetary policy.
More recently, the finance ministers for each country pleaded for the U.S. to do what is necessary to avoid default. As a result of America’s deteriorating financial condition, it should come as no surprise that major holders of U.S. debt have expressed interest in diversifying their holdings. Based on the chart above, it appears as though they are making good on their threats to liquidate or significantly curtail purchases of new securities. Although nations like China and Japan own a variety of U.S. debt instruments, the chart considers only U.S. Treasury securities, since these represent the largest category of U.S. securities and are the primary vehicle for the U.S. government to finance its federal debt.
Also reflected in the chart — net holdings fell for four months straight in the middle of 2013. The potential implications of major holders of U.S. debt diversifying away from U.S. securities could be severe, as it could induce other foreign investors to follow suit, which could threaten the stability of the U.S. economy and jeopardize the status of the U.S. dollar as the world’s reserve currency. What will be interesting to see in the coming months is how the government shutdown and contentious debate over the debt ceiling impacted foreign holdings since July 2013.
Originally written for the website of the Hard Assets Alliance, an industry association of trusted economic and investment research firms that fosters a better understanding of prevailing economic trends and offers investing advice. Open a SmartMetals™ investing account from Hard Assets Alliance here.