Lest you be led astray by the screams of panic coming from the far right wing of the political spectrum (read Ron Paul), here are the facts and you can decide whether or not the country is in crisis from the threat of its debt being held by too many foreigners.
Our currency only becomes worthless when faith and credit extended to others based upon the economic growth engine ceases to exist. Yes, we long ago abandoned "specie" currency (based on the gold standard), but there is no turning our backs on our "fiat" currency at this late stage.
President Obama is betting on the collective horsepower generated by the American economic engine to pull us over the top of this long steep climb we are all engaged in. The problem, as I see it (cup half full), is that he's pouring gasoline on the burning house in deficit spending, coupled with a declining birth rate. Can the nation produce enough worker bees to make it happen?
Europe, Russia, China and virtually every other socialist culture around the world have failed to reproduce fast enough to fuel their economic engines -- will the US make the same mistake? We lament about mortgaging the futures of our children and grandchildren, but worse is passing off that debt to our posterity that remains forever unborn.
Biggest Holders of US Government Debt
As the US government spends an unprecedented amount of money to fix the nation's economy, there is an equally great need to raise the cash to pay for it. This is accomplished through borrowing, whereby Uncle Sam sells Treasury securities of varying maturity. For investors, the government bills, notes and bonds are considered a safe financial product because they have a guaranteed rate of return, based on faith in future US tax revenues. The government has been partially funding operations via Treasury securities for decades. This borrowing adds to the national debt, which is now above $11 trillion and is rising every day. Much of that debt is held by private sector, but about 40 percent is held by public entities, including parts of the government. Here's who owns the most. (Source: Paul Toscano, US Treasury, US Federal Reserve & US Office of Debt Management).
1. Federal Reserve and US Intragovernmental Holdings
That’s right, the biggest holder of US government debt is the United States itself. The Federal Reserve system of banks and other US intragovernmental holdings account for a stunning $4.806 trillion in US Treasury debt. And with recent announcements from the Fed, potentially another $1 trillion may be added to its balance sheet. About a decade ago, the total government holdings were "only" $2.5 trillion.
2. Mutual Funds
According to the Federal Reserve, mutual funds hold the second largest amount of US debt compared to any other group. Including money market funds, mutual funds and closed-end funds, this group of investments manages approximately $769.1 billion of US Treasury securities.
3. China (Mainland)
The buzz word in the market for US debt of recent has been China. The world’s most populous country is also the largest and most important international buyer of US debt. From September 2008 to January 2009, China raised its stake by over $120 billion. Standing at $739.6 billion in January, China’s holdings have skyrocketed from $492.6 billion from a year earlier. Hong Kong, which is not included in China's total, holds an additional $71.7 billion.
4. Japan
Another major US trade partner, Japan holds a huge amount of the country’s debt, with a stunning $634.8 billion. As recently as January 2008, Japan held the more US debt than any other country, but currently holds the #2 spot, as far as foreign governments are concerned.
5. State and Local Governments
US state and local governments have over a half-trillion dollars invested in American debt, according to the Federal Reserve. The level of investment has remained very stable over the past three years, moving within the range of $516.9 billion and $550.3 billion from 2006 to 2009.
6. Pension Funds
Pension funds control large amounts of money, reserved for personal retirements, and thus are obligated to make relatively safe investments. This group includes both private and local government pension funds, totaling $456.4 billion. The private pension fund category also includes US Treasury securities held by the Federal Employees Retirement System Thrift Savings Plan "G Fund."
7. Other Investors
Although the most recent numbers for this category are from September 2008, this extremely diverse group includes individuals, government-sponsored enterprises, brokers and dealers, bank personal trusts, estates, corporate and non-corporate businesses for a total of $413.2 billion.
8. Oil Exporters
Big oil means big money... and big investment into US debt. Included in the group of oil exporters are Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria. The group combines for a total of $186.3 billion, up from $140.8 billion one year earlier.
9. Caribbean Banking Centers
The US Treasury identifies this group as institutions in the Bahamas, Bermuda, the Cayman Islands, Netherlands Antilles, Panama and the British Virgin Islands. Holdings recently hit $176.6 billion, up from $109.2 billion in January 2008.
10. Brazil
The South American economic giant has $133.5 billion in holdings, according to the Treasury. Brazil’s holdings of US debt have been relatively stable over the past year, with a high of $158 billion in June, and a low of $127 billion in December.
11. Insurance Companies
According to the Federal Reserve Board of Governors, insurance companies hold $126.4 billion in Treasury securities. This group includes property-casualty and life insurance firms.
12. United Kingdom
Britain currently holds $124.2 billion in US debt, but the number has fluctuated dramatically in the past year, ranging from $279 billion, but dropped to as little as $55 billion in the summer of 2008.
13. Russia
Russia's investment in US debt has grown over 330 percent in the past 12 months, from $35.2 billion in January 2008 to $119.6 billion in January 2009.
14. Depository Institutions
As of the fourth quarter of 2008, the Federal Reserve Board of Governors lists depository institutions as holding approximately $107.3 billion in US debt. This group includes commercial banks, savings banks and credit unions.
15. Luxembourg
A country slightly smaller than Rhode Island currently holds $87.2 billion in US government debt. Over the past 12 months, Luxembourg’s holdings have ranged between $66.1 billion and $104.7 billion.
So what does all that mean to you, the individual US taxpayer? It may be true that the average American household has about $98,000 of that total debt (depressing thought), but we can all be grateful there are lots and lots of diversified foreign investors who still believe in the American economic engine and are still investing in the USA.
As long as robust growth in our economy fires up again (there are skeptics that will happen), the good news is that we have still have buyers for our debt.
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