Remember when economic observers warned that China’s massive accumulation of U.S. government bonds meant that it could threaten to cause an American debt crisis?
This was known as China’s ‘nuclear option’, given that it would also cause economic damage to China itself, but it was a concern since China’s massive debt holdings were seen as a stranglehold on the U.S. financial system which China could exert at any moment it pleased.
Well the nuclear option has been disarmed… by the flight of Americans out of stocks and into bonds:
But a funny thing happened to the “nuclear option” story”: American investors have absorbed almost $4 trillion in U.S. Treasuries, making domestic owners the largest holders of Treasuries. China’s holdings, as vast as they are, are now a modest percentage of domestic owners–as little as 25%.
This domestic move out of equities and into Treasuries is a sea change with broad consequences. Hundreds of billions of dollars has been pulled out of U.S. equities and dumped into low-yield Treasuries. For context, recall that domestic U.S. assets (real estate, bonds, equities, and other marketable capital) is around $52 trillion.
So thank the economic crisis, and the ensuing panic out of stocks. Americans overwhelmingly own their government’s debt again:
So owning $4 trillion in Treasuries–more than all non-U.S. owners combined, including China, Japan and the Gulf Oil states–does not require that great a percentage of U.S. capital. Even if U.S. owners absorbed another $4 trillion, that would make Treasuries less than 20% of total capital.
The net result of this structural change is the Chinese “nuclear option” has been reduced to a firecracker.
It’s worth emphasising the $52 trillion of U.S. assets mentioned above, since it brings up a further point…
Many like to berate the U.S. for being bankrupt, and it’s true that the government’s finances are messy. Yet American private wealth remains enormous by global standards, even if most Americans don’t realise it, since wealth inequality is to vast in the U.S..
Even after the crisis, there is an enormous amount of wealth within America, relative to the world. China gets a lot of airtime about its giant trillion dollar pile of U.S. bonds… and it is huge… but it’s still peanuts relative to American wealth.
Some economies in the world are more heavily dependent on the government, and their economies are heavily comprised of government entities, but not America’s and this is why many observers get the country wrong.
In fact, the U.S. government is a much smaller part of the American economy than the private sector, thus you can’t judge the state of America by the state of its government alone.