In order to promote his “Roadmap” for his national debt reduction plan, Wisconsin Representative and Mitt Romney running mate Paul Ryan put out a set of scare charts on what happens if the size of the U.S. debt grows unchecked.
The silliest, most meaningless chart of the bunch is this one on Who Owns The National Debt.
Photo: Paul Ryan
The message he’s trying to convey is clear: More and more the U.S. is going cap-in-hand abroad to fund government spending. The Chinese (whom Mitt Romney has accused of not trading fairly with us) own a huge chunk. Ergo we’re at their mercy.
This is a popular notion, and a candidate running on a scare platform is wise to tell this story, but the story is nonsense on stilts.
China has no financial leverage over the US, and the idea of the government having to go beg foreigners in order to spend U.S. dollars is a myth.
The reason China owns boatloads of U.S. debt is because China sells boatloads of goods (literally) to U.S. consumers. And then China is left holding a bunch of U.S. dollars. And when you’re left holding a bunch of U.S. dollars, the rational place to put those U.S. dollars is U.S. Treasuries. It really is that simple.
It’s why Japan (also a huge trading partners) owns a bunch of U.S. debt, and why Brazil (which wasn’t even on the chart in 1990), is now also a sizable U.S. debt holder.
As you can see in this chart, in the ’90s, the U.S. hardly had any imports from Brazil. Now they’re getting to be quite substantial, a trend that has been a major boon to the South American economic giant.
Photo: Wikimedia Commons
The essential driver of foreign ownership of U.S. debt is this trend: The boom in global trade, the trade deficit, and the great extent to which foreigners need to recycle a lot of U.S. dollars that they receive.
The flipside of the U.S. situation is Japan.
Japan famously runs a trade surplus (meaning that on net there aren’t going to be a lot of Yen floating all around the world), and so not surprisingly, its debt is almost entirely domestically owned. Very few foreigners need to recyle Yen into JGB (Japanese Government Bonds).
OK, but what if China decided that after receiving U.S. dollars in payments for various goods and services, it just didn’t want to recycle them into Treasuries. Maybe the Chinese decided it wanted to spend those dollars directly on oil from the Mideast.
That’s fine too. Then it would be Mideast dollar holders who would recycle them into Treasuries. Eventually the dollars will find their way home, so to speak.
And the fact of the matter is that China does reduce its Treasury holdings from time to time.
Here’s a chart, via Katchum at SeekingAlpha, that’s current as of this Spring, of Chinese holdings of U.S. debt.
The numbers go up and down, but it’s totally irrelevant for the U.S. Treasury market.
Of all the things to worry about, this is not one. Paul Ryan can breathe easy.
And if you really want to get in the weeds on this issue, go check out the paper from Professor Dan Drezner on The Myth of China’s Financial Leverage (.pdf). It looks at how China did hope to exert influence over U.S. policy during the financial crisis, and that it was done to no avail and no impact.
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