Foreign holdings of US debt have been coming down a bit. Is that a problem?

Jared Bernstein

Jared Bernstein Senior Fellow, Center on Budget and Policy Priorities

I remember when foreign ownership of U.S. government debt amounted to very little, as shown on the left end of the figure below (the share of total publicly held debt owned by foreigners).

Source: US Treasury

I next remember that this share was growing rapidly, closing in on half about a decade ago. What I didn’t know was that the share has been falling back a bit. In fact, it’s about 10 percentage points off of its peak.

I discovered this because I went to look at the data as part of the broader conversation I’ve been engaged in regarding the lack of attention to and concern about our growing fiscal imbalances, an unusual dynamic what with the economy closing in on full employment.

In the course of that conversation, some have raised the concern that because a significant share of our debt is held be foreign investors, we face risks that were not invoked in earlier decades.

There’s the “sudden stop” scenario that’s been deeply damaging to emerging economies, when foreign inflows quickly shut down, slamming the currency and forcing painful interest rate hikes.

There’s a less pressing but still concerning risk that foreign investors’ demand for US debt would fall at a time like the present, when the Treasury needs to borrow aggressively to finance our obligations in the face of large tax cuts and deficit spending. That scenario could lead to “crowd out,” as public debt competes with private debt for scarce funds, pushing up yields.

At the very least, it leads to more national income leaking out in debt service than when those shares in the figure were lower.

How serious are these concerns?

In contemplating this question, I see the WSJ has an interesting piece out this AM on this very question. One factor in play they note is that China’s share of our sovereign debt has fallen by half, from 14 to 7 percent. That reflects both China’s decline in dollar reserve holdings, and more internal investment. Also, the piece notes the role of the stronger dollar and the resulting increased price of holding dollar assets.

But the key point re our own debt and rate dynamics is this one:

“Deficit hawks have suggested government bond yields could jump if foreign investors shed their holdings of U.S. debt, which in turn could push up the cost of other debt throughout the economy, such as mortgages and business loans. Those warnings haven’t come to pass.”

The fact that Treasury yields remain low confirms that part of the story. Also, as Krugman and others have maintained, it just doesn’t make a ton of sense that countries with large dollar holdings would undertake actions, like dumping US debt, to debase their holdings. And, if they did, the cheaper dollar would make our exports more competitive.

So, while I worry more about our weird, upside-down fiscal stance right now than most progressives, the declining trend at the end of the figure above doesn’t give me too much pause.

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Reposted from On the Economy

Jared Bernstein joined the Center on Budget and Policy Priorities in May 2011 as a Senior Fellow.  From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama’s economic team. Prior to joining the Obama administration, Bernstein was a senior economist and the director of the Living Standards Program at the Economic Policy Institute in Washington, D.C. Between 1995 and 1996, he held the post of deputy chief economist at the U.S. Department of Labor. He is the author and co-author of numerous books, including “Crunch: Why Do I Feel So Squeezed?” and nine editions of “The State of Working America.”

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Sam Pizzigati Editor, Too Much online magazine

If a billionaire “invites” you somewhere, you’d better go. Or be prepared to suffer the consequences. This past May, hedge fund kingpin Carl Icahn announced in a letter to his New York-based staff of about 50 that he would be moving his business operations to Florida. But the 83-year-old Icahn assured his staffers they had no reason to worry: “My employees have always been very important to the company, so I’d like to invite you all to join me in Miami.” Those who go south, his letter added, would get a $50,000 relocation benefit “once you have established your permanent residence in Florida.” Those who stay put, the letter continued, can file for state unemployment benefits, a $450 weekly maximum that “you can receive for a total of 26 weeks.” What about severance from Icahn Enterprises? The New York Post reported last week that the two dozen employees who have chosen not to uproot their families and follow Icahn to Florida “will be let go without any severance” when the billionaire shutters his New York offices this coming March. Bloomberg currently puts Carl Icahn’s net worth at $20.5 billion.

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