Subsidizing U.S. Borrowing & Spending

Over half of all U.S. Treasury debt is now held by overseas owners. If that makes you uncomfortable, you are not alone.

For most of recent history, foreigners holding US debt has been 20% or less. The shift began under Bill Clinton, starting around 1993, and accelerated into ’94-95. When Clinton finished his 2nd term, foreign ownership of US Treasuries was about 35%.

That ownership has continued to rise under President Bush, and now stands at 52%.

I find rather interesting the general reaction to this; Perhaps 50% represents a tipping point of sorts, but I suspect the main difference on this score between the present and past perception of this is the context:

When Clinton was in office, the economy was in full throated boom. (Who gets the credit for that, as well as the blame for the subsequent collapse is a discussion best saved for another time, but suffice it to say there’s plenty of both to spread around). The two party system forced mutual compromises and the pragmatic centrists had the last laugh: The national deficit was being reduced, a budget surplus was accumulating, the nation was at peace, and the Boomer retirement was decades away. The US was seen not just as a safe haven, but a vibrant and growing economic powerhouse.   

Either no one noticed or no one cared that foreign ownership of US Debt was increasing. I certainly do not remember it getting much ink.

The context at present is very different. Alas, all expansions are followed by contractions. As so often happens, the Boom ended in a Bust; Not one but two wars were prosecuted (one clearly necessary, the 2nd, less so). On top of several national emergencies that ratcheted up spending (9/11, Katrina), we have seen runaway ordinary spending from the Federal government. One party rule — no matter which party — causes profligate wasting of OPM, and the present group of spendthrifts are no different. Surprisingly, the President has never vetoed a spending bill.

The main purchasers of US Treasuries today are the sellers of low cost goods who are on the recieving end of our enormous balance of trade deficit. They are awash in dollars, and have few other places to send them. Besides, ppurchasing US Treasuries helps to keep US interest rates low, which allows credit dependent US  Consumers to in turn keep buying their stuff.   

So while the increases in foreign ownership are similar (percentage or dollar wise) the context is very very different.

click for larger graphic 


chart courtesy of NYT

Here’s the Ubiq-cerpt:™

"Since the end of 2000, as George W. Bush was preparing to take office, federal debt is up by $1.1 trillion. American investors, as a group, have lent not one penny of that. They have, instead, been net sellers of Treasury securities.

The latest numbers on just who buys and owns Treasury debt, released in late September, showed that foreign investors and central banks have increased their holdings of Treasuries by $1 trillion since Mr. Bush took office. Another $213 billion was bought by the Federal Reserve.

That record stands in stark contrast to the deficit-spending president to whom Mr. Bush is often compared – Ronald Reagan. Reagan still holds the record for largest dollar increase in federal debt, $1.4 trillion. But it took him eight years to accomplish that, in contrast with Mr. Bush’s four-and-a-half years.

During the Reagan years, overseas investors were willing to take up only about a sixth of the new debt. When Reagan took office, foreigners were owed 21 percent of the national debt, excluding the share owed to the Federal Reserve. By the time he left office, that figure was down to 19 percent. It held steady under President George H. W. Bush, but began to rise under President Bill Clinton, when overseas investors bought more Treasuries than were issued. By the time he left office, the percentage was up to 36 percent. Now it is 54 percent.

As the foreigners signed up to buy, many Americans bailed out. American banks and insurance companies, which collectively owned more than 40 percent of Treasuries when Dwight D. Eisenhower was president, now own less than 8 percent.

While Mr. Bush seems certain to set a record for biggest dollar increase in debt under one president, by other measures this has not been a particularly profligate administration. Net debt has risen at an annual rate of 6.4 percent under President Bush. That is far higher than the 0.4 percent rate under his predecessor, Bill Clinton, but it is below the rate of all presidents from Gerald R. Ford to George H. W. Bush."



More Than Ever, the U.S. Spends and the Foreigners Lend
NYT, October 1, 2005

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