A Stitch in Haste

A Stitch in Haste recommends the following report from the Congressional Research Service:

Foreign investment in federal debt has grown in recent years, prompting questions on the location of the foreign holders and how much debt they hold. …[D]uring the past four years, foreign holdings of the public debt have increased more than the total privately held debt has increased. Foreign holdings of debt increased by $856.5 billion to nearly $1.9 trillion from December 2000 to December 2004.

The report is 5 pages — a very quick read. Some hasty stitches:

–For the first time in recent years, foreign individuals and governments now hold a majority of our national debt — 51.6% to be precise.

–The top three foreign holders of federal debt, by country, are Japan, Mainland China and the U.K. These rankings are the same as five years ago, but these three nations’ share of total foreign holdings are increasing. Mainland China’s share, for example, has more than doubled, from 6.0% to 12.2%.

–Roughly 60% of all foreign holdings of federal debt are held by official investors (i.e., governments), while 40% is held by private foreigners.

–Mainland China owns five times as much federal debt as OPEC.

–None of these numbers reflect the fraudulent Social Security “trust fund,” which is, for now, “non-public” debt.

My take on foreign holdings of debt is fairly straightforward. Historically speaking, foreigners — especially Asian governments and institutions — have been rotten investors who show an irrational preference for overpriced “trophy” properties and holdings. And what better trophy is there for inflated foreign egos — and state propaganda — than “owning” the United States Government?

Whatever. If China’s Communists and other Asian investors want to loan our government money at laughably low interest rates, then I say let them. And when interest rates rise, which they will, these investors will lose their shirts, just like they always do.

On the other hand, our own hack politicians tend to be as least as foolish as foreigners, and if those in Washington believe that this willingness of foreigners to subsidize our own fiscal recklessness can continue ad infinitum, then we are in for a very rude awakening.

The real problem is not with our current account deficit (i.e., our “trade deficit”), but with its root cause, namely the federal budget deficit. The higher the deficit, by definition the more public debt we need to issue, and the more likely that the new debt will be bought by foreigners.

Clean up our own fiscal house first, and the rest of the global neighborhood will take care of itself.

Previous CRS Recommendations:
China’s Internet Censorship
Summary of Rumsfeld v. FAIR

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