I remember when foreign ownership of U.S. government debt amounted to very little, as shown on the left end of the figure below (the share of total publicly held debt owned by foreigners).
I next remember that this share was growing rapidly, closing in on half about a decade ago. What I didn’t know was that the share has been falling back a bit. In fact, it’s about 10 percentage points off of its peak.
I discovered this because I went to look at the data as part of the broader conversation I’ve been engaged in regarding the lack of attention to and concern about our growing fiscal imbalances, an unusual dynamic what with the economy closing in on full employment.
In the course of that conversation, some have raised the concern that because a significant share of our debt is held be foreign investors, we face risks that were not invoked in earlier decades.
There’s the “sudden stop” scenario that’s been deeply damaging to emerging economies, when foreign inflows quickly shut down, slamming the currency and forcing painful interest rate hikes.
There’s a less pressing but still concerning risk that foreign investors’ demand for US debt would fall at a time like the present, when the Treasury needs to borrow aggressively to finance our obligations in the face of large tax cuts and deficit spending. That scenario could lead to “crowd out,” as public debt competes with private debt for scarce funds, pushing up yields.
At the very least, it leads to more national income leaking out in debt service than when those shares in the figure were lower.
How serious are these concerns?
In contemplating this question, I see the WSJ has an interesting piece out this AM on this very question. One factor in play they note is that China’s share of our sovereign debt has fallen by half, from 14 to 7 percent. That reflects both China’s decline in dollar reserve holdings, and more internal investment. Also, the piece notes the role of the stronger dollar and the resulting increased price of holding dollar assets.
But the key point re our own debt and rate dynamics is this one:
“Deficit hawks have suggested government bond yields could jump if foreign investors shed their holdings of U.S. debt, which in turn could push up the cost of other debt throughout the economy, such as mortgages and business loans. Those warnings haven’t come to pass.”
The fact that Treasury yields remain low confirms that part of the story. Also, as Krugman and others have maintained, it just doesn’t make a ton of sense that countries with large dollar holdings would undertake actions, like dumping US debt, to debase their holdings. And, if they did, the cheaper dollar would make our exports more competitive.
So, while I worry more about our weird, upside-down fiscal stance right now than most progressives, the declining trend at the end of the figure above doesn’t give me too much pause.