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The Power of US Debt

by Mariam Samuel and Gareth Minson

President Trump has often been cited claiming that he will negotiate America’s debt through a lower rate of repayment. These claims give rise to many conversations about United States debt, specifically who owns it. The two largest holders of United States debt are the U.S. followed by China.

If Trump went through with his claims, the biggest population affected would be U.S. entities who own more than half of U.S. debt. At a lower buy back rate, the United States would incur the most losses as a result of being repaid less of the owed bonds. Also a point of concern is the large weight which other countries have on our debt with foreign countries owning over $6 trillion of around $20 trillion dollars of United States debt.

The data table shows the most recent data for the top 5 countries (other than the United States) holding U.S. debt in December. Although this is only one month’s worth of data, a look at the past year’s data correlates these countries’ holdings. It is interesting to note that out of the top five, only 2 of these countries are in the top five of U.S. trade partners.

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Economist Brad W. Setser, recently published an article emphasizing the importance of close surveillance of this data. His observations, focused on China, have revealed that China’s formal reporting underestimates their true holdings and reserves data. He goes on to explain that China holds more than U .S. treasuries, giving even more reason to need for further investigation.

The American markets are accustomed to significant purchases by foreign governments. In fact, these purchases have become quite significant. Daniel O. Beltran, Maxwell Kretchmer, Jaime Marquez, and Charles P. Thomas point out that foreign governments ownership of bonds grew 750% between 1994 and 2010. This figure has grown to $6.3+ trillion since 2010. The authors mentioned that the rapid rise in ownership of bonds had to do with emerging markets with large surpluses and America’s bonds being viewed as a safe place to store money. In their report back in 2012, the effects of the foreign investment slowing by $100 billion per month, it would be disastrous in both the short (40-60 points) and long run (20 points). While the Federal Reserve board’s numbers look bad, Christopher Martin, in a more updated study of the data, says that the numbers are only worse. The short run will see changes of 70-100 points and the long run will see a similar shift. To summarize, it is dangerous for the American bond market for emerging markets to see their growth slow because these countries will run smaller surpluses and will buy fewer bonds. As Rose and Katherine point out in their blog post, as the cost of bonds rises, the yield falls.

The Balance, Council on Foreign Relations, CNN Money and the Dept of the Treasury.

12 thoughts on “The Power of US Debt

  1. croughanm20

    Although debt is a necessity, it is concerning how heavily the US is becoming indebted to foreign markets like China. It works out well since we are two civil nations who see no need for conflict; however, if times were harsher, a debt so massive could be a focal point in a large and messy dispute.

    1. bullr20

      Not to sound alarmist, but I am not so sure that "we are two civil nations who see no need for conflict." Trump's politics are inflammatory and largely nonsensical, and Xi Jinping has recently made several moves to consolidate power within China, including ending term limits and expanding censorship and surveillance within the country. Both leaders appear increasingly volatile, and Trump has expressed his eagerness to engage in a large and messy dispute, claiming "trade wars are good and easy to win."

  2. dugganj20

    The fact that the U.S. has a large portion of its debt in China's hands greatly displays the force of international relationships and markets. The intertwining of our economies is a marvel, yet also slightly concerning. It seems China has a hand-hold over the U.S. in that they are helping us. I wonder if the government takes this into consideration as our debt increases, as well as our dependance on foreign countries to come to our aid.

  3. dodsonm20

    Does the United States own any other nations debt? I would be interested to see how interconnected debt is amongst foreign nations. Also how stable is the bond market? Is it like the dow and fluctuate greatly off of speculation? I'm curious to find out by how much do emerging markets tend to their interest in US bonds based on our economy.

    1. faithepinho

      I'm curious about a claim made in the last article cited: "The authors mentioned that the rapid rise in ownership of bonds had to do with emerging markets with large surpluses and America’s bonds being viewed as a safe place to store money." How are emerging markets considered a safe place to store money? Isn't the nature of emerging markets characterized by instability and volatility? Would like to hear a little more on that...

      1. Katherine Ingram

        I think this statement means emerging markets with trade surpluses view the US as a safe place to store money. Countries with trade surpluses generally have low investment spending compared to savings. They invest in US bonds which are viewed as stable across the world and this allows the US to finance "government budget deficits" according to this article by Bloomberg.

  4. bernsteinl20

    A very concerning point you make is how the renegotiating the payment of debts would effect a large amount of American Citizens. Would this not cause greater problems for the American government, if there are many citizens who had purchased US debt got a lower amount, possibly negating any benefit gained from these negotiations?

  5. the prof

    Interdependence ... what happens to the price of bonds if China tries to unload quickly? If they're only earning 2% in interest, it doesn't take much of a change to wipe out a huge amount of (their and our) wealth. Small investors can dump bonds. Big investors are stuck!

    1. bbschaeffer1

      But doens't the interdependence ensure that big investors would not act rashly enough to unload in such quantity as to cause a real problem? No one wants to hurt their bottom line at the end of the day, right?

  6. scottm20

    In the past 15 hours, U.S. national debt surpassed $21 trillion for the first time ever. This shows the historic significance and increasing concern that debt poses for our nation. More importantly than the current debt value, the debt’s long term trajectory is a real cause for concern. There is no long term solution currently in place to begin reducing the debt; in fact, the most recent major legislation change, Trump’s tax cut plan, is estimated to increase the debt by $1.5 trillion over the next 10 years, which is ~6-7% of what GDP is likely to be then. As cited in a SeekingAlpha article, the ultimate catalyst in our debt equation is the U.S.’ political system. In our current two polarized factions system, there is not much compromise in the foreseeable future to take on a debt issue of this magnitude head on. (

  7. the prof

    I have no idea what Trump means by "renegotiating debt." The US government runs a large deficit and also needs to roll over debt as it matures, so needs to keep issuing new bonds. Plus even the threat would cause absolute chaos in financial markets. So it's not practical.

    Then there's the question of whether the President has any legal or other ability to decide that past debt should be declared invalid. For example, Article Six of the Constitution emphasizes that national debt is sacrosanct, even that inherited by the new Federal government in 1789 from the revolutionary era of "Continentals". Likewise there is the contract clause in Article I. While Trump businesses have gone through bankruptcy, in practice a sovereign country cannot, even when a government is overthrown.

    Finally, as comments above correctly point out, the biggest holders of US debt are we ourselves. Banks hold bonds as reserves. Large corporations keep bonds as a form of liquidity, they pay better interest than a bank account and have been presumed safer than any bank account. And many individuals hold bonds in their retirement portfolios, even if they don't realize it, or have a money market mutual fund rather than a regular bank checking account. The assets of MMMFs are government bonds. Trump probably has significant wealth in bonds, even if he doesn't realize it.


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