“Our free stuff [government programs] today is being paid for by taking money from our children and borrowing from China. When that note comes due — and this isn’t racist … but it’s going to be like slavery when that note is due, right? We are going to be beholden to a foreign master.”
— Former Alaska governor Sarah Palin (R), speaking at the Iowa Faith & Freedom Coalition’s fall fundraiser, Nov. 9, 2013
This is certainly an interesting analogy from the former governor of Alaska, which prompted a vigorous back and forth on Twitter. We don’t fact check opinions, no matter how unusual, but Palin’s remarks do reflect some common misunderstanding about foreign holdings of Treasury securities. So let’s take a deeper look.
First of all, we should note that Palin is not the first politician to highlight borrowing from China. Here’s a youthful looking Barack Obama in 2008, complaining that “the way [President] Bush has done it over the last eight years is to take out a credit card from the Bank of China in the name of our children…. That’s irresponsible. It’s unpatriotic.”
But what do the data actually show?
Yes, China is a biggest single holder of Treasury debt, owning $1.268 trillion as of August of this year, but that amounts to only about 10 percent of all U.S. debt held by the public, which was nearly $12 trillion at the end of August. Moreover, Japan is close behind China, holding $1.149 trillion in U.S. Treasury securities, and yet for some reason its holdings generate much less attention.
The chart below, which originally appeared on The Washington Post’s WorldViews blog, illustrates the distribution of holdings well. Foreign holdings of U.S. debt actually amount to less than 50 percent of the total U.S. debt, but as a percentage of privately held debt, foreign holdings amount to about 56 percent. (That’s because about $2 trillion in publicly traded debt is held by Federal Reserve banks.)
As of early 2003, foreign holdings of privately held debt were about 41 percent of the total, so the percentage has certainly crept up in the past decade.
But there is a further wrinkle. Nearly 30 percent of the debt held overseas is not held by governments, but private investors, according to the Treasury Department. Put another way, about 39 percent of privately held debt — and 33 percent of all publicly traded debt — is held by foreign governments. So that makes the “foreign master,” as Palin put it, a bit less baleful.
The Congressional Research Service earlier this year wrote an interesting report on foreign holdings of federal debt, which we have embedded below for readers who want to know more. But the key point it makes is that the rising debt itself is the biggest risk to the long-term health of the U.S. economy, not necessarily the fact that foreign governments may own a portion of that debt.
The fact that U.S. Treasury debt is in such demand in many ways is a vote of confidence in the United States during a period of economic turmoil, as U.S. Treasuries have generally been regarded as among the safest investments. The report also notes that there is little the United States could do to prevent foreigners from buying U.S. securities, as they are traded on secondary markets.
The bottom line: “Economically, the only way government could reduce its reliance on foreign borrowing is by raising the U.S. saving rate, which could be done most directly by reducing budget deficits.”
The Pinocchio Test
Palin, like Obama and many other politicians, falls into the trap of (a) overestimating the holdings of Treasury securities by China and (b) exaggerating the potential impact on the United States.
The key issue is rising federal debt, especially if debt is used to facilitate consumption (such as programs for the elderly) rather than make capital investments. It is possible that future generations will be richer and more productive, and thus able to afford the bill, but it largely depends on how big the economy is at the time — not necessarily who is holding Treasury bonds.
Rather than China’s investment in U.S. debt securities, much more worrisome issues for future U.S.-China relations instead could well be China’s rising military power in Asia or competition for raw materials needed for U.S. manufacturing.
Politicians should speak accurately about foreign holdings of the national debt, rather than so simplistically — especially when using slavery analogies. We can’t quite declare this worthy of Four Pinocchios, because China is the largest overseas holder of Treasury securities, but it is close.