Foreigners Own More of Nation's Debt
By Allan Sloan
Tuesday, July 6, 2004; Page E01
We've just finished celebrating the Fourth of July. What better time than now to contemplate the state of our nation's independence? Financial independence, that is.
Here's the deal. The United States has the mightiest economy in the world, but we've become enormously dependent on foreign investors to lend us the money it takes to keep Uncle Sam's checks from bouncing. At least, that's how I interpret Treasury statistics that track the size and ownership of our national debt.
The statistics show that foreign and international investors account for the entire increase in privately owned Treasury securities since George W. Bush took office. Issuing those securities is how the Treasury covered federal budget shortfalls. Privately owned Treasury securities are those that belong to investors, as opposed to those owned by federal government trust funds or the Federal Reserve Board. Private investors own about half our $7 trillion-plus of national debt; the Fed and federal trust funds own the rest.
According to Treasury data -- table OFS-2, if you want see for yourself, on the Web at www.fms.treas.gov/bulletin/ b24ofs.doc -- when the Bush administration started, we had $2.88 trillion of privately held national debt, of which $1.03 trillion was owned by foreign and international investors. As of March 31, the most recent data available, privately owned debt had risen to $3.5 trillion, of which foreigners owned $1.71 trillion.
Now, a little math. Privately owned debt, as you can see, was up by $620 billion since the Bush administration started -- but foreigners' holdings were up by $680 billion. This means that foreigners accounted for the entire increase in privately held debt -- and then some.
To the sticklers among you: My starting point for this math is year-end 2000, three weeks before Bush took office. I used that date because the Treasury table offers only quarter-end numbers. But the three-week overlap with the Clinton administration isn't significant.
Besides, by ending at March 31 -- the June 30 numbers weren't out last week -- I'm cutting the president some slack. If recent patterns held during the second quarter, the numbers are even worse now. Foreign investors may well own a majority of privately held national debt. They held 49 percent on March 31, up from 36 percent when Bush took office.
Do you think the federal government has got a debt jones? Obviously, it does. Think we're hooked on foreign money to keep interest rates on Treasury borrowings from soaring into the stratosphere? What else is there to think?
Please understand that I'm not a xenophobe. Almost everyone in this country used to be a foreigner or is descended from foreigners. And foreign purchasers of Treasury securities have done this country a huge favor. They've kept interest rates here lower than they'd otherwise be and freed up U.S. investors' capital for uses more productive than financing budget shortfalls created by tax cuts and our wars in Afghanistan and Iraq. (I've stopped attributing deficits to the recession, which ended almost three years ago.) Why should we care about our government getting hooked on foreign money? Because one day, for reasons of their own, foreign central banks, the major purchasers of Uncle Sam's securities, may cut way back or stop entirely. For strategic reasons, not malicious ones.
Foreign central banks often own Treasury securities to carry out strategies involving their own currencies. If their situation changes, they'll be gone. And we'll be up the creek.
We hear all sorts of comforting noises about how the budget deficit isn't so bad. That it's less than the 6 percent of gross domestic product it reached during the high point -- make that the low point -- of the fiscally irresponsible Reagan years. But when you add back the Social Security surplus -- money we're supposedly setting aside for future retirees, but that we're spending for current expenses -- we're closing in on 6 percent.
Of course, given the fact that the rest of the world is financing so much of our deficit, maybe we should look at our deficit not relative to the U.S. GDP, but to world GDP. Or interplanetary GDP, if we can find Martians or Venusians with a few bucks to lend us.
My problem with getting heavily hooked on foreign money -- or getting hooked on foreigners for any essential, such as oil -- is that it makes us vulnerable. And one day, the bill will come in. It always does.
Remember that old saw: Whose bread I eat, his song I sing. Tune up your vocal cords, fans. I don't know what we'll have to sing to satisfy our foreign creditors if the day of reckoning arrives while we're still hooked on their loans. But it sure won't be America the Beautiful.
Sloan is Newsweek's Wall Street editor. His e-mail address is firstname.lastname@example.org.
© 2004 The Washington Post Company