BUNK 47
INDEBTED TO CHINA
Blanche DuBois, in the dramatic final scene of A Streetcar Named Desire, says, “I have always depended on the kindness of strangers,” as she gets taken away to be institutionalized. She’s touched in the head, you see. Why else would she rely on strangers?
And that is how many Americans regard America. We’re in debt—huge debt—and it’s terrible! (It really isn’t—see Bunk 45.) But worse—our debt is owned by—eek!—foreigners! Scary foreigners! Worse, mostly the Chinese!
The story goes: The Chinese (and to a lesser extent, other foreigners) prop up our profligate, overspending ways—purely out of kindness. A charity, really. They only do it so we’ll keep buying their stuff, giving them the advantage of a trade surplus and us the disadvantage of a trade deficit that will keep piling on and blow up on us later. (No, it won’t—see why just ahead in Bunk 48.) The view is: They hold our huge debt like a pistol to our head with their twitchy trigger fingers. And what if they decide, cruelly, to pull the trigger—i.e., stop buying our debt and instead dump it all? In effect saying, “We’re done with being nice to you, America! We’re not going to, selflessly and for no other reason, buy your dumb debt anymore!” Well, then we’d be sunk. Wouldn’t we?
This argument was particularly potent throughout 2009. As the US sold more debt during the wave of global fiscal stimulus aimed at halting the recession, there was endless talk of the world shifting away from the dollar to another reserve currency. Maybe the euro. Or even China’s yuan!

Investors Don’t Invest Out of Charity

Bunk of the first order. Investors—institutions, nations, even individuals—buy US debt freely and willingly. They don’t do it to be nice to us; they do it because it makes vast, self-interested sense for them. Think about your own behavior. Do you invest just to make the issuer happy—or anyone but yourself? Out of charity? (Maybe you do give to charity—but you don’t think of that as an investment in the traditional sense at all. It’s charity!) No! You invest to satisfy whatever goals you have. You want the best return for whatever amount of risk you’re willing to accept.
The Chinese are no different. China is perfectly free, right now, to buy debt from any and almost every other nation—and they do, some. But no other nation remotely matches the size and depth of US debt markets. Plus, China has, to varying degrees, maintained a peg to the US dollar for years (though they loosened it some again in 2010). To do so, they keep large, dollar-denominated reserves. They want their reserves super-safe—hence they buy über-safe US Treasuries. Sure, China could utterly abandon the peg, but they’d likely do so gradually, and officials have said so. Even then, my guess is they’d still maintain large reserves in dollars, as many, many other nations do that don’t have a peg.
But all this fear is silly, because the largest holder of US government debt is . . . the US government.
Figure 47.1 shows who owns US Treasuries. About 37 percent is owned by hundreds of US federal government agencies, but mostly the Medicare and Social Security trust funds. You don’t worry about debt the US government owes to itself. States, public pension plans, and other local governments hold another 5.7 percent. But you don’t worry about California holding US government debt. Rightfully, you worry about California for many other reasons—but not for holding US debt.
Then, American investors—individuals, corporations, charities, banks, mutual funds, hedge funds, a myriad of other entities, people—ones like you—domestic investors—own 27.7 percent. You like owning Treasuries. You see them as safe. (And they are! But not always necessarily in the way folks think—see why in Bunk 1.) You don’t usually get a high return on them—haven’t since the early 1980s. Over long periods, stocks typically get better results, but you’re confident the US government will pay interest and return principal on maturity. My point: With money you want to be super-safe, you probably weren’t buying Greek debt in 2010. If you were buying Greek debt, you were thinking of it as high-risk, high-return potential—not US-Treasury safe.
Figure 47.1 Who Owns US Treasury Debt? Uncle Sam Is Biggest!
Source: Thomson Reuters; US Department of the Treasury, as of 12/31/2009.
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So, 70 percent of US federal debt is held by Americans, American governments, and/or American entities, which benefit Americans. Just 30 percent is held by the non-US world. Of that, 7.3 percent is held by China. Interestingly, Japan holds 6.2 percent—almost the same—but no one complains about them. And you don’t hear a lot of phobic fantasizing about Japan dumping its Treasuries. Is there something magical about the Chinese that scares us that isn’t magical about the Japanese? That’s silly and bunk.
Mathematically, it would make no difference to markets if the Japanese sold while the Chinese bought or vice versa. You know that in your bones. Then, the UK owns about 2 percent—you’re perfectly sanguine about that. Britain is our great friend! You don’t care about Mexico or Thailand (0.3 percent each), Luxembourg (0.7 percent), Israel (0.1 percent), or India (0.3 percent). All tiny!
Remember—China, Japan, the UK, Thailand, Luxembourg, and India are happy to buy and hold our debt. They can buy other nations’ debt. And they do! Just much less. But they like buying our debt and do so to satisfy their own investing and/or policy ends, not from some sense of charity or kindness.
And the countries that hold big positions in our debt change over time. At various times in the last few years, Japan has held more of our debt than China. It goes back and forth. And three years from now, who knows? Could be Eastern European nations own a lot of our debt—or Australia, Brazil, whoever.
Nations will at periods buy more US debt, or buy less, all depending on myriad conditions within their own borders. But whether the world is buying more or less, it cannot compare to the amount of US debt being bought and held within US borders.
If at any point buyers of government debt become unhappy with the interest rates they receive from their various debt holdings, they can sell some to buy others. So today they are happy with their US debt. Maybe tomorrow they’ll change their views! If China changes its view and sells US debt heavily, that pushes down the prices of US Treasuries relative to what they were before, and pushes up the yield. That makes US rates relatively more attractive than before, so other investors sell some other country’s debt to buy some of the now-more-attractive US debt, offsetting most of the Chinese selling effects. China sells, that impacts US yields, everyone else finds US debt more attractive and buys. The total impact is very small. That’s the part that’s virtually impossible for most people to get. And that’s why, fundamentally, you needn’t fear indebtedness to China, Japan, the UK, Brazil, or Bhutan.
Ironically, just 20 years ago we had the same fear of the Japanese. In fact, we pretty much thought about the Japanese then the way we do the Chinese now: “Eek! They’re taking over the world and buying up our assets!” Didn’t happen. Relax and have more faith in Capitalism. It works.
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