Deficit spending is financed overseas---violates ‘in the U.S.’

This report presents current data on ownership of U.S. Treasury securities and major holders of federal debt by country. Federal debt represents the accumulated balance of borrowing by the federal government. The gross debt is composed of debt held by the public and intragovernmental debt held by federal trust funds. To finance the publicly held debt, U.S. Treasury securities are sold to investors. Treasury securities may be purchased directly from the Treasury or on the secondary market by individual private investors; the Federal Reserve; financial institutions in the United States or overseas; and foreign, state, or local governments.

As of December 2022, there was $24.4 trillion of publicly held debt outstanding, up from $16.1 trillion in December 2018, an $8.4 trillion increase (figures are rounded). During the same period, foreign holdings of debt increased by $1.1 trillion to a total of approximately $7.4 trillion. After staying relatively flat in dollar terms for several years, overall foreign holdings increased in 2019, 2020, and 2021, then fell in 2022. Because the total debt has increased faster than the debt held by foreigners has, the share of federal debt held by foreigners has declined in recent years. In December 2022, foreigners held 30% of the publicly held debt. Interest on the debt paid to foreigners in 2022 was $184.4 billion.

Foreign holdings can be divided into official (governmental investment) and private sources: 50.3% ($3.7 trillion) of foreign holdings in U.S. federal debt are held by governmental sources, and private investors hold the other 49.7% ($3.6 trillion).

Including private investors and governments, the top three estimated foreign holders of federal debt by country, as of December 2022, are Japan ($1.1 trillion), China ($0.9 trillion), and the United Kingdom ($0.7 trillion). Based on these estimates, Japan holds approximately 14.7% of all foreign investment in U.S. publicly held federal debt, China holds approximately 11.8%, and the United Kingdom holds approximately 8.9%.

From an economic perspective, foreign holdings of federal debt can be viewed in the broader context of U.S. savings, investment, and borrowing from abroad. For decades, the United States has saved less than it invests. Domestic saving is composed of saving by U.S. households, businesses, and governments. By accounting identity, when the government runs budget deficits, it reduces domestic saving. By the same accounting identity, the shortfall between U.S. saving and physical investment is met by borrowing from abroad. To be a net borrower from abroad, the United States must run a trade deficit (i.e., it must buy more imports from foreigners than it sells in exports to foreigners). Borrowing from abroad has occurred through foreign purchases of both U.S. government and U.S. private securities and other assets.

As a result of foreign purchases of Treasury securities, the federal government must send U.S. income abroad to foreigners. If the overall economy is larger as a result of federal borrowing (because the borrowing stimulated economic recovery or was used to productively add to the U.S. capital stock, for example), then this outcome may leave the United States better off overall on net despite the transfer of income abroad. In other words, without foreign borrowing, U.S. income would be lower than it currently is net of foreign interest payments in this scenario.