February 12, 2009
The $800 Billion Question: Will Foreign Creditors Continue to Finance U.S. Debt?
of new paper.â€
Okay, now I’m really worried. Shouldn’t we all be pulling together to get through the recession, and not relying on outside creditors? Years ago, in a college econ class, I remember learning that during World War II, Americans were the principle holders of public debt, as they bought war bonds and the like to do their patriotic duty. By the 1970s and 80s, foreigners held an average of 19% of U.S. public debt. By the 1990s, that had changed as foreigners steadily increased their purchases of Treasury securities. By 1997, 38% of U.S. debt was held overseas. And today, of the debt that is available to be financed by the public, more than half is held by foreign and international holders, according to the Treasury Department.
What’s wrong with foreigners holding so much of our public debt? Here’s what economist Dorothy Meadow Sobol had to say in a 1998 report to the New York Federal Reserve Bank: “In deciding whether to hold, add to, or sell their Treasury assets, both official and private investors will consider, among other issues, the political and economic climate in the United States and their own need for dollar-denominated assets. Uncertainty about the outlook for U.S. interest rates or the exchange rate of the dollar as well as any major shock to the U.S., global, or home-country economy could prompt any of these investors to sell their Treasury holdings and shift their dollar assets into another currency. If these sales were to take place in a substantial amount, they could drive up U.S. interest rates and have wide-ranging effects on U.S. financial markets.â€
In one indication that the Chinese are getting nervous our ability to pay them back, former adviser to the Chinese central bank, Yu Yongding, recommended earlier this week that China seek assurances from the U.S. that the $682 billion they hold in U.S. debt won’t be eroded by “reckless policies.†A guarantee is something the U.S. can’t and won’t do. But if the Chinese government actually takes up Yu’s suggestion, it would be akin to your bank asking for additional collateral to back a loan you’ve had for years.
Bernard Anderson, an economist and professor of management at the University of Pennsylvania’s Wharton School, told me to stop all the hand-wringing.
“Look at the alternatives available to the bond purchasers overseas. Who else’s bonds are out there with a higher yield? There aren’t very many other countries that can compete,†Anderson points out. “Would the Chinese rather buy Russian bonds? There’s no safer haven in the bond markets around the world. For anyone who buys U.S. paper it’s likely the paper will appreciate in value when the American economy turns around.â€
Anderson, who is also a member of Black Enterprise’s Board of Economists, believes it’s a good thing that foreigners hold as much U.S. debt as they do. It’s an affirmation that, in our new global economy, we’re all in this together, he says.
So, what do you think? Are you worried about