China Owns $1.3 Trillion of Our Debt. That Shouldn't Bother You.

"No subject attracts as much wrong commentary from people in positions of authority and influence as China's purchases of American government debt," wrote Slate blogger Matt Yglesias last month. 

He may not be a person of authority, but asked about the nation's debt in an in-depth profile in Bloomberg this week, Euro Pacific Capital CEO and perennial pessimist Peter Schiff rang the China bell as loud as he could: 

"The minute China tells America, 'I want my money back, I don't want to loan it you again, just give me the money,' then we default," Schiff said on the radio. "The sooner the Chinese do this, the sooner we can start fixing our economy, because the longer they wait, the bigger our problems get."

Stop, stop, stop. This is exactly what Yglesias is talking about. 

We don't have to wait for China to stop lending us money, or to want its money back. It's been happening for the last two years. China has been a net shedder of Treasury bonds since 2011: 

Source: Treasury.gov. 

What has this done to our debt markets? Did we default? Of course not. Interest rates on 10-year bonds are a full percentage point lower today than in mid-2011, when China's ownership of Treasuries peaked. 

The ownership of our national debt is a subject of constant confusion and misconception, so let's put some numbers on the table. Here's who owns the nation's $16.7 trillion of debt as of March 2013 (the latest data available): 

Source: Office of Debt Management, Treasury, Federal Reserve, Office of Under Secretary for Domestic Finance. 

And here are the top 10 foreign owners, as of March:  

Source: Treasury. 

There's something odd about how we react to the amount of debt China owns. Like Schiff, a lot of Americans seem to view China's Treasury ownership as a threat, but pay no attention to the fact that Japan holds almost the same amount. And while China has slowly been shedding U.S. debt, Japan has been steadily accumulating Treasuries -- more than $250 billion in the last two years alone. I'll let a sociologist ponder why that is, but I think this shows these fears have far more to do with emotions than facts.

Leaders in countries like China don't lend money to the United States because they like us, or because we remind them of their grandson. They do it because it's in their interest. America imports close to half a trillion dollars worth of goods from China every year. China needs that business, and the best way to ensure it sticks around is to keep the U.S. dollar strong versus its currency, the renminbi. It does that by buying a lot of American assets, like Treasuries and mortgage-backed securities. If the dollar were to crash, China could lose just as much as (or more than) America.  

More importantly, lenders can't just say "I want my money back," as Schiff implies. Bonds have maturities. If you want your money back, you have to either wait for that maturity date or sell your bonds in the open market to someone who is willing to wait. 

So, what might happen if a major bond holder were to sell a huge amount of Treasuries? This, too, isn't something we have to wait for. It happened five years ago. 

Just as the financial crisis was heating up, the Federal Reserve needed to make room on its balance sheet to bail out the banking system. It did this by selling $300 billion of Treasuries between November 2007 and June 2008. Long-term interest rates actually fell during this period, from 4.2% to 4%. 

Debt isn't something to belittle, but as psychologist Daniel Kahneman once wrote: "Human beings cannot comprehend very large or very small numbers. It would be useful for us to acknowledge that fact." The debt market is so enormous that not only does China's $1.3 trillion Treasury portfolio make up less than 8% of Treasuries outstanding, but rapid sales in the hundreds of billions of dollars can be absorbed fairly easily. 

Think of it this way. China owns about 8% of our debt. Warren Buffett owns about 8% of Coca-Cola. How often do you hear Coke investors worrying that Buffett is going to dump his Coke stake? You don't, for two reasons: It's not in his best interest to sell, and even if he did the market could absorb the sales over time without much fuss. It's a similar situation with China's ownership of our debt. 


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  • Report this Comment On November 08, 2013, at 3:36 AM, kyleleeh wrote:

    Ever since I first starting seeing Peter Schiff on TV 8 years ago I've always been amazed that the media never calls him out on what seems to be such an obvious conflict of interest.

    This guy is the head of Euro Pacific Capital, his income is based entirely on fees generated from investors wanting to put money out side of the US. He has every incentive in the world to convince as many people as possible that investing in the US is going to be a disaster.

    Asking Peter Schiff what he thinks about the US economy, is like asking Coke what it thinks of Pepsi. Even if he thinks it's great he still has every reason to tell it's lousy.

  • Report this Comment On November 08, 2013, at 9:22 AM, RobertBaillieul wrote:

    @kyleleeh "Asking Peter Schiff what he thinks about the US economy, is like asking Coke what it thinks of Pepsi."

    Well said.

  • Report this Comment On November 08, 2013, at 11:10 AM, slpmn wrote:

    Borrowing money from Japan is like borrowing money from a close friend. The close friend you nearly beat to death when you were kids, but you shook hands after the fight and now he's been your best buddy ever since. And in the back of your mind, you know if you had to do it again, you could. And more importantly, they would do anything to avoid it.

    Borrowing money from China is like borrowing money from the guy in your office that you don't really like, and worse, you know he wants your job. But you need the money, and he's got plenty, and is standing there with his checkbook out, pen ready, so you clench your teeth, force a smile, and take it. Can you kick his *ss? Probably. But you know you never want to find out because odds are, it would leave you with some artificial limbs and maybe a steel plate in your head.

    So I think there's a difference, if only one of perception. But I think perception matters. In international relations, all you have is your reputation and others' perception of your strength. Internally, Americans don't like to feel like they owe anyone anything, but the ugly truth is, we owe lots to other countries. And, importantly, this hasn't always been the case. Not that long ago, we didn't have much foreign debt, a far bigger proportion was held by Americans and American institutions. I would argue that's better. Do I have an economic model that supports that contention? No. I just think it's better.

  • Report this Comment On November 08, 2013, at 11:47 AM, jlclayton wrote:

    While it may be a more comfortable feeling to think that the United States can independently own all of it's debt and not rely on any foreign country, IMO that's not in our country's best interest. The world we now live in is completely interconnected with commerce on a global scale. Having other countries find it in their best interest to help keep our dollar and economy as solid as possible can only be beneficial in the long run. Unfortunately, many politicians and financial pundits find it as a useful tool to use as propaganda. Morgan, you do a great job of bringing common sense discussion to these types of issues so that people like me can put them into better perspective.

  • Report this Comment On November 08, 2013, at 12:05 PM, slpmn wrote:

    ^ Good point. I don't think we're doing it for that reason, but it's a legitimate benefit.

  • Report this Comment On November 08, 2013, at 5:41 PM, xetn wrote:

    This article completely misses the real issue: WE SHOULD NOT BE INDEBTED TO THE TUNE OF +16 TRILLION DOLLARS!

    But I believe Schiff is right about one thing: the Chinas, Japans etc are crazy to be purchasing out debt. Its not that we may (but probably will) default at some time, the real reason is they are losing money by the constant inflation of the currency (creating ever more money out of thin air).

    The last I read, the Fed has been buying the bulk of the US debt all this year. First they create the money and then they use it to purchase the debt. Then they collect interest and refund back to the US government any interest over and above the Fed's requirements.

  • Report this Comment On November 08, 2013, at 7:40 PM, TopAustrianFool wrote:

    It shouldn't bother you because we are going to repudiate most of that debt. The Fed inflates and the treasury and congress subsidizes everything from food and energy, so the price inflation is adulterated. The problem is that it shows up in the debt. When the debt becomes too big then govt will slow down the borrowing, repudiate part of the debt, slow down the subsidies and then you will see hyperinflation. At that point China is probably in political turmoil, so who cares.

  • Report this Comment On November 08, 2013, at 7:48 PM, cholero wrote:

    " Peter Schiff wrung the China bell as loud as he could: "

    Shouldn't it be, "rang the bell"?

    No expert myself, just seemed funny.

  • Report this Comment On November 08, 2013, at 10:31 PM, colin2862 wrote:

    There is one thing right about this, and that is the debt is the result of "vendor financing". The dollar holdings are because we bought stuff from them. The real issue is the future value of those dollars, and the threat of default. The only way the US can pay for its bills is to print money as it doesn't collect enough in taxes. GDP has not increased. so this is like issuing more shares in a company with no revenue or profit growth, to keep the lights on.The share price should go down, but it hasn't so far, as no one is selling the shares. That is what I call a bubble waiting to pop. One other thing about China, what better way to neutralize the US Military than to crash the USD. If you want to take over the south pacific you need a large navy and no opposition. Also, you are ignoring the Chinese position as far as the USD global reserve status (weakening rapidly) and also their position on a de-Americanized, read militarily dominated world. So, step 1 get all the pieces in place to allow the destruction of the USD by setting up trade agreements outside of the USD system. Step 2 grow you customer base, and diversify. Step 3 setup the framework for a replacement global currency mechanism Step 4 Make sure you have a strong military Step 5 pull the trigger and sell your USD positions Step 6 wait for the inevitable military cuts in the US. Step 7 Take control of the south pacific. We are between step 4 and 5.....

  • Report this Comment On November 09, 2013, at 12:25 AM, xetn wrote:

    Colin2862:

    We pay enough interest to the Chinese to pay for almost all of their military spending.

    In the meantime, the Chinese are importing tons of gold through Hong Kong and keeping the entire production of China's gold miners. They are well on the way to replacing the USD as the replacement currency of the world.

  • Report this Comment On November 09, 2013, at 3:37 AM, kyleleeh wrote:

    << step 1 get all the pieces in place to allow the destruction of the USD by setting up trade agreements outside of the USD system. Step 2 grow you customer base, and diversify. Step 3 setup the framework for a replacement global currency mechanism Step 4 Make sure you have a strong military Step 5 pull the trigger and sell your USD positions Step 6 wait for the inevitable military cuts in the US. Step 7 Take control of the south pacific. We are between step 4 and 5.....>>

    China's navy is tiny compared to NATO, and far technologically inferior. It's also mostly built for defense and sea lane denial, they don't have many long range offensive craft, and only a single aircraft carrier...and even that they had to purchase from Russia.

    If you studied history better you would see that when nations suffer a currency collapse (like Germany did in the 20s) they usually result in a pro military government, not military cuts.

    Also if a low currency valuation was that bad for an economy then China would have one the worst in the world. Their workers aren't very productive so the only thing allowing them to compete with us in the first place is artificially surprising the Yuan, while propping up the dollar. Take that away, or even reverse it and half of China would be unemployed.

  • Report this Comment On November 09, 2013, at 7:52 AM, duuude1 wrote:

    Here we have an author trying hard to educate us on how to use numbers simply, but in a way to get an *objective perspective* on big questions - and we get comments on the twelve-step method to world domination... if the Chinese were really trying to destroy the US, they could just look at the Schiff's over here and say, "Let them breed themselves into stupidity and extinction! Just wait them out... we're almost there!"

  • Report this Comment On November 09, 2013, at 8:00 AM, Mathman6577 wrote:

    The best idea is to cut debt, not worry who we owe.

  • Report this Comment On November 09, 2013, at 9:35 AM, cmalek wrote:

    "The minute China tells America, 'I want my money back, I don't want to loan it you again, just give me the money,' then we default," Schiff said on the radio. "

    When Japanese interests were buying up anything and everything in the US, including the Rockeffeler Center, US paper headlines were screaming hysterically "Japan Will Own the United States!", "Better Start Learning Japanese" and so on and so forth. Then the Nikkei imploded to the tune of 50%. Problem solved. No more hysterical headlines. Who knows what the future will bring. So far, for a long time, most predictions about the economy have been wrong. Are the forecasters all of a sudden start getting their predictions right? I doubt it.

    BTW - how much foreign debt does the UNITED STATES hold?

  • Report this Comment On November 09, 2013, at 6:25 PM, skypilot2005 wrote:

    China and Japan send us finished goods.

    We send them I. O. Us.

    We have a higher standard of living as a result.

    Macroeconomics 101

    You are welcome.

    Sky

  • Report this Comment On November 12, 2013, at 10:38 AM, broknrekord3 wrote:

    This is a wonderful synopsis of what national debt means on a global scale for the common Fool.

    Unfortunately, many folks are too busy screaming that the sky is falling to remember that all of the global players are so interconnected that it is nearly impossible for one nation of this size to fall without the rest stumbling as well. And as the global economy becomes more closely knit together, the global community will feel each country's economic hiccup in more unity, for better or worse (and most likely for the better).

  • Report this Comment On November 12, 2013, at 10:57 AM, remmdawg wrote:

    The article misses the point. Our government shouldn't be spending trillions it doesn't have. There is no accountability for how the money is spent. It is a HUGE drag on our economy... or worse. Period.

    It's insane. Our government needs to stop it and we need to stop electing or reelecting politicians who act like Bernie Madoff. We need to stop demonizing the responsible adults in the room who actually believe a debt ceiling was put there for a reason.

  • Report this Comment On November 12, 2013, at 12:00 PM, mhendley100 wrote:

    What a dumb commentary...if you want to do some math; please note that 40% of our federal government debt is owned....wait for it....our federal government. So how would you feel about a bank that finances its spending by issuing debt and buying it with other peoples money?

  • Report this Comment On November 12, 2013, at 12:09 PM, wasmick wrote:

    "In the meantime, the Chinese are importing tons of gold through Hong Kong and keeping the entire production of China's gold miners. They are well on the way to replacing the USD as the replacement currency of the world."

    LOL. Oh no!

    Are they cornering the market on salt, beads cattle, cowrie shells, livestock, and beaver pelts too?!?

    Those Chinese are so smart and tricky.

  • Report this Comment On November 12, 2013, at 12:10 PM, longtbt wrote:

    Thanks, Morgan - great article.

    Would love to see you follow up with a discussion on Macroprudential Policy and Financial Repression techniques currently implemented by the Fed,

    as well as a discussion on the best moves forward in Fiscal Policy.

    thanks....

  • Report this Comment On November 12, 2013, at 1:04 PM, TMFHousel wrote:

    <<What a dumb commentary...if you want to do some math; please note that 40% of our federal government debt is owned....wait for it....our federal government. >>

    That's mentioned in the article.

    <<So how would you feel about a bank that finances its spending by issuing debt and buying it with other peoples money?>>

    That's actually how all banks work. They borrow money from customers who lend in the form of deposits, and banks re-lend that money by making loans.

    Thanks for reading,

    Morgan

  • Report this Comment On November 12, 2013, at 1:55 PM, ryanalexanderson wrote:

    <<Debt isn't something to belittle, but as psychologist Daniel Kahneman once wrote: "Human beings cannot comprehend very large or very small numbers. It would be useful for us to acknowledge that fact." The debt market is so enormous that not only does China's $1.3 trillion Treasury portfolio make up less than 8% of Treasuries outstanding, but rapid sales in the hundreds of billions of dollars can be absorbed fairly easily. >>

    I agree with this statement completely. But I find it more concerning than comforting. It explains succinctly how we got here. The debt has become so large, while the costs of servicing it have barely budged, that I can't see any political pressure to keep the debt/GDP ratio stable, ever.

  • Report this Comment On November 12, 2013, at 1:59 PM, TMFHousel wrote:

    << I can't see any political pressure to keep the debt/GDP ratio stable, ever.>>

    It already is stable. The deficit over the last year was slightly below the rate of nominal GDP growth. Current CBO forecast calls for debt/GDP to decline over the coming decade.

    http://www.fool.com/investing/general/2013/10/31/there-goes-...

  • Report this Comment On November 12, 2013, at 2:19 PM, Trashman0430 wrote:

    You all need to reread what Yglesias said.

    "The minute China tells America, 'I want my money back, I don't want to loan it you again, just give me the money,' then we default," Schiff said on the radio. "The sooner the Chinese do this, the sooner we can start fixing our economy, because the longer they wait, the bigger our problems get."

    Yglesias may not like China but China is his example he believes like many of us that we have too much debt and being cut off by one or more of our creditors would be good for our economy because it would cause us to maintain our budget. No where does he suggest we transfer that debt to other creditors.

  • Report this Comment On November 12, 2013, at 2:22 PM, Trashman0430 wrote:

    Excuse me the quote is from Schiff.

  • Report this Comment On November 16, 2013, at 6:12 AM, sanjib100 wrote:

    US should have been behaving in the world as many disciplined wealthy people behave in society.

    Provide credit to poor but hard working and developing countries to grow and pay good interest to support US's lifestyle. Instead of borrowing and spending, we should have been investing and spending the income.

  • Report this Comment On November 16, 2013, at 5:50 PM, 092326 wrote:

    Yes, I agree their is not yet a problem at this time. However, QE may continue for some years with an increasing debt load and eventually higher interest rates which will then present the government with a serious problem. Default, huge tax increases or inflated dollars. Or will grow our economy and avoid all three?

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