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Foreigners Now Own $5.48 Trillion Of US Debt

From the Associated Press:

Foreign holdings of US debt hit record $5.48T

By CHRISTOPHER S. RUGABER | December 17, 2012

WASHINGTON (AP) — Foreign ownership of U.S. Treasury securities rose to a record level in October, a sign that overseas investors remain confident in U.S. debt despite a potential budget crisis.

Total foreign holdings of U.S. Treasurys rose to $5.48 trillion in October, the Treasury Department said Monday. That was up 0.1 percent from September. Still, the increase of $6 billion was the weakest since total holdings fell in December 2011.

So much for all the talk in the lead about ‘confidence.’

China, the largest holder of U.S. government debt, increased its holdings slightly to $1.16 trillion. Japan, the second-largest holder, boosted its holdings by a smaller amount to $1.13 trillion. Brazil, the country with the third-largest holdings, increased its total to $255.2 billion.

Remember back in the good old days when people used to shrug off the national debt by saying ‘well, we owe it to ourselves’? Of course, we should be grateful that we can get anyone to buy our debt.

The new figures show that investors are still seeking the perceived safety of U.S. Treasurys, even as lawmakers and President Barack Obama remain at odds over whether to raise the U.S. borrowing limit as part of a broader budget deal.

But economists also said the slowdown in purchases of Treasury securities suggests that investors are more willing to buy other debt, including from European governments. That might indicate that fears of a financial catastrophe in Europe are easing.

And that the aforementioned confidence is a fantasy.

The federal government is expected to hit its borrowing limit of $16.39 trillion by the end of December. Treasury Secretary Timothy Geithner has said he would resort to the same financial maneuvers he used in the last debt standoff in 2011 to keep the government from defaulting on its debt.

But these operations will buy only a few weeks’ time, until late February or early March. By then, the government will face the prospect of a first-ever debt default if Congress doesn’t raise the debt ceiling.

After the last debt standoff, Standard & Poor’s downgraded the government’s credit rating on long-term securities one notch from the highest level of AAA to AA+. It was the first-ever downgrade of U.S. government debt.

As we noted at the time, the head of Standard & Poor’s sovereign ratings said that their credit downgrade was not due to a stand-off on the debt ceiling. It was entirely due to the lack of any progress in reducing the government’s debt as a percent of the GDP.

Last month, Fitch Ratings said Obama will need to quickly reach a budget agreement with Congress over the "fiscal cliff" or risk losing Fitch’s AAA rating on U.S. debt.

Again, this is misleading. If the deal does not reduce the debt to GDP ratio, there will be a risk of a credit downgrade. But the AP doesn’t want to get us thinking about reducing government spending. We can’t have that.

This article was posted by Steve Gilbert on Tuesday, December 18th, 2012. Comments are currently closed.

2 Responses to “Foreigners Now Own $5.48 Trillion Of US Debt”

  1. GetBackJack

    Who owns the other $11 trillion?

  2. Petronius

    The US government’s total debt obligations as a percentage of GDP are now larger than those of Greece. According to Morgan Stanley, the US debt as a percentage of GDP is higher than all of the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain).

    The US debt has now grown so massive it cannot possibly be repaid. Therefore, it has become necessary to print more money.

    It’s often said that US Treasury bonds carry no default risk because the Fed can always print more money. Although in that case the debt would be nominally repaid, since the dollars would have less value.

    Since the election, the US dollar has been falling against all major foreign currencies, including the euro.

    The Fed has become the default buyer of US government debt. As a result, the Fed has been busily flooding the globe with more paper money. Moreover, the Fed has announced its intention to keep interest rates near zero for at least a few more years, thereby making the dollar still less attractive.

    As a result of all this printing, foreign creditors are diversifying out of the US dollar and Treasury bonds. The world’s central banks are selling US paper and buying gold and strong foreign currencies. China is leading this trend. China is divesting its US paper and buying gold, real estate, and natural resources. China is even telling its citizens to buy gold, and has made it easy for them to buy gold at banks and post offices.

    In what may be the ultimate irony, if the fiscal cliff is avoided, or if the American economy improves, capital may flow from US Treasuries into the stock market, real estate, commodities, or other investments. The retreat from bonds could occur independently of any action by China or any inflation expectations. If bonds start selling off, it will put upward pressure on the government’s cost of borrowing. Interest rates on Treasuries will have to rise from their current historic low level of about 2 percent.

    At 2 percent the cost of servicing the public debt works out to about 6 percent of the annual Federal budget. If the interest rate returned to traditional levels, it could throw the Federal budget into shock. Other government spending programs would be crowded out. The debt service payments might become unsustainable, except with massive printing.

    Even the modest Republican proposal would result in $800 billion deficits each year. If financed at the current interest rate of 2 percent, the Republican proposal would add about $900 billion in interest expense over the next ten years. But if financed at 4 percent, it would cost $2 trillion.

    Here is a YouTube video by Tony Robbins explaining the US debt load and the futility of the current negotiations over taxing the rich. The video is 19 minutes long, but well worth watching :

    http://www.youtube.com/watch?v=TRaLytkf6vU

    The video was filmed some months ago, when the debt was $15 trillion. Now it is about $16.3 trillion.




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