To satisfy the U.S. government's need for revenue, Washington collects taxes and fees. What happens if this isn't enough? What happens if the federal government needs more? That is the subject of this article in which we'll reveal who owns the most U.S. debt and how much of it is owned by foreign nations. We'll begin by explaining, in simple terms, how the debt market functions.
Debt 101
An individual takes on debt when they finance a new car, house, etc. The U.S. government does so when it issues securities. Specifically, the federal government issues Treasury bills, notes, and bonds. The primary difference is in their maturity. For example, Treasury bills have a maturity less than one year. Treasury notes mature in one to ten years. Treasury bonds have maturities greater than 10 years.
To issue its debt, the government holds periodic Treasury auctions. A successful auction indicates a strong demand for U.S. Treasury securities. If the auction doesn't go well, it means demand for Treasuries is weak. Who owns the most Treasury's?
Owners of U.S. Debt
The largest owner of U.S. debt is Social Security. Since the Social Security system is a government entity, how can the government own its own debt? Good question. This is where the "house of cards" theory resides. Some believe the federal government is merely moving the IOUs from one shell to another, hoping to escape the watchful eye of its citizens. In any event, Social Security owns about 16% of the debt followed by other federal government entities (13%), and the Federal Reserve (12%). How much is owned by foreign governments? The following chart contains the answer.
According to the U.S. Treasury Department, at the end of August 2014, more than a third of the debt was owned by foreign countries (34.4%). The largest foreign holders of U.S. debt were Mainland China (7.2%) and Japan (7.0%). What is the consequence of having such a large percentage of debt held by foreign nations? It depends. It depends on the relationship between the U.S. and the specific foreign country. It also depends on the global interest rate environment. Finally, it depends on the geo-political climate and the degree of fear around the globe. This is the case because when fear rises money flows into U.S. Treasuries which is viewed as a safe place to invest. The percentage of debt owned by countries that are less friendly to America is about 10%. This includes China, several oil exporters (Ecuador, Venezuela, Iran, Iraq, Libya, etc.), and a few others. The worst case would materialize if the largest holders decided to sell their Treasury securities at the same time. This could potentially decrease demand which would push yields higher. If yields rose, the federal government would find it more difficult to service the debt, pushing the deficit higher. If the deficit rose, the total debt burden would accelerate and, unless demand for U.S. debt were to increase, it could get ugly. Will this transpire? It's not too likely. At least not for the foreseeable future anyway.
Conclusion
Given the state of the global markets, the U.S. is still considered to be the best house in a bad neighborhood. Even though more than one third of the debt is owned by foreign nations, as long as there are no safer places to invest, money will find its way here. Therefore, global turmoil would be in the best interest of the federal government. Anything which raises fear will bring money to the Treasury and allay the need for higher taxes. However, one day this unsustainable path we're on will reach its day of reckoning. However, that's probably not any time soon.
