United States Public Debt
The public debt of the United States is the consolidated money that the federal government has borrowed against securities issued by the US Treasury and other federal government agencies. Some of these securities are held by federal agencies and other accounts of the federal government itself, making them intragovernmental debt. The other main sources of debt for the US government are investments made by foreign governments, private investors, state governments, and the Federal Reserve System.
The debt of the federal government is the result of the government spending more money than it takes in, creating a budget deficit. The federal debt is likely to decrease in a year when there is a surplus in the federal budget. The calculation of budget deficit or surplus is usually calculated as a whole, without taking into account the intragovernmental transfers. The growing public debt has been a matter of much concern for economists in the United States, and has been a bone of contention between the Republican Party and Democratic Party. Standard & Poor's, the world’s leading credit rating agency, downgraded the US Economy to AA+ on August 5, 2011, as a result of the escalating public debt. On August 11, 2011, President Barack Obama signed the Budget Control Act of 2011, averting a default on the public debts. A default on federal debt would have undermined the confidence of investors in US securities. Interest rates would have soared and financial markets destabilized had the Budget Control Act not been signed. A default would have caused panic among the foreign investors including China and might have led to heavy selling of the US Treasury securities further devaluing them.
As of January 2012, the total foreign holdings of US Treasury securities amounted to about $5.048 trillion. As of May 2011, China (People’s Republic of China) was the largest holder of US debt. The US debt holdings of the PRC have increased considerably from about 6% of all foreign holdings of US Treasury securities in 2000 to about 26% in 2011. China’s holdings have shown low levels of growth in 2011-2012 (a growth of 0.4% from Jan 2011- Jan 2012).
Top 15 Foreign Holders of US Securities (January 2012)
|1||People's Republic of China||1159.5|
|3||Oil Exporting Countries||258.8|
|5||Caribbean Banking Centers||227.8|
|12||Hong Kong SAR||130.3|
The oil exporting countries holding US debt include Algeria, Bahrain, Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Oman, Qatar, Saudi Arabia, Venezuela, and the UAE. The Caribbean Banking Centers are the Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Netherlands Antilles, and Panama.
Build Up of Foreign Debt
Debt Ceiling is the Congress-approved legal limit on borrowing by the US federal government. Prior to 1917, the Congress approved each borrowing. A debt ceiling was introduced in the United States in 1917, when the second Liberty Bond Act went into effect. Over the past two decades, the debt ceiling has been raised many times.
|Date||Debt Ceiling in Billions USD|
|August 9, 1990||3,195|
|October 28, 1990||3,230|
|November 5, 1990||4,145|
|April 6, 1993||4,370|
|August 10, 1993||4,900|
|March 29, 1996||5,500|
|August 5, 1997||5,950|
|June 11, 2002||6,400|
|May 27, 2003||7,384|
|November 16, 2004||8,184|
|March 20, 2006||8,965|
|September 29, 2007||9,815|
|June 5, 2008||10,615|
|October 3, 2008||11,315|
|February 17, 2009||12,104|
|December 24, 2009||12,394|
|February 12, 2010||14,294|
While the rise in debt ceilings has often concerned US economists, much of it has been attributed to global economic factors.
Will China ‘Dump’?
By 2006, the growing concern in the United States was the possibility that foreign investors may stop buying US Treasury securities or dump their holdings by indulging in heavy selling. In 2009, China announced its intentions of investing in International Monetary Fund gold bonds to mitigate any risks incurred by their investments in the dollar. US economists saw this as an immediate cause for concern. Their fears were mitigated by China’s declaration of faith in July 2010.
The Chinese State Administration of Foreign Exchange (SAFE) declared that China had no intentions of dumping its holdings. China also declared that its holdings of US federal debt were not a political control mechanism, but only an economic investment decision. A heavy investment in gold was also ruled out, given the volatile market trends and the mercurial prices. SAFE’s 2010 announcement was a reiteration of China’s confidence in the dollar and an estimate of the relative risks of investing in the Eurozone:
“The U.S. Treasury market is the world's largest government bond market, and U.S. Treasury bonds deliver fair good security, liquidity and market depth with low transaction costs. The U.S. Treasury market is a very important market for China..” – SAFE (July 2010)
In April 2012, China loosened its control over its currency, the Renminbi (RMB), allowing it to rise and fall more freely against the US dollar. While some economists regard this relaxation in China’s currency policy as the country’s move to establish the RMB as the preferred reserve currency, such an eventuality seems far-fetched in a dollar dominant global economy.
Chinese Influence In The US
According to the 2000 Census, Chinese is the third most spoken language in the US with over two million speakers. Over 215 million US residents speak English, 28 million speak Spanish, 1.6 million speak French and 1.4 million speak German.
Between 1998 and 2009, the number of college student studying Chinese in the US doubled and hundreds of high schools in the country now teach the Chinese language. On the flip side, the growing US trade deficit with China has cost 2.8 million US citizens their jobs between 2001 and 2010. China’s exports to Wal-Mart alone accounted for 11% of the growth of the total US trade deficit with China between 2001 and 2006.
The growing influence of China and Chinese culture in the US is best demonstrated by the growing Chinese settlements in the major cites of the country. The New York City Metropolitan Area contains the largest ethnic Chinese population outside Asia with over 665,714 residents as of 2009 in seven Chinatowns.
A look at the US imports from China has its own story to reveal. In 2011, the total value of US exports to China amounted to about $103,878.6 million, while imports from China were about $399,355 million. In 2010, the United States imported $364,943 million worth goods and services from China, but exported about $91,860 million. The trend of imports in excess of exports continued through early 2012. The United States is a major market for Chinese goods and services. The economies of both countries are subtly interlinked. While China accrues a considerable surplus of the dollar by virtue of its exports, a conversion of this surplus into the Chinese Renminbi (RMB) is likely to raise the value of the RMB, making exports more expensive thus diminishing the export market. The US Treasury securities and bonds market, on the other hand, is a fairly stable option for China to invest the export surplus funds into. This mitigates the fear that China may liquidate its holdings and cause trouble for the US economy, economists have said. A plunging Eurozone economy still makes the US economy the safest bet when it comes to investment by SAFE. It is unlikely that China will allow its major export market to flounder. The country grapples with fears of social unrest if it fails to provide its burgeoning workforce adequate jobs and employment opportunities.
In 2003, Goldman Sachs predicted that by 2050 China would dominate the export market for manufactured goods worldwide. Is such dominance a threat to the US economy? Will China keep investing in US Treasury securities or will Chinese holding start to decline? Is China likely to be successful in reducing its dependency on the US market? Is the United States the safest investment option for China despite Standard & Poor’s negative outlook on the US economy? A number of these questions are significant when it comes to studying the economic interdependence of the two countries.
Does China Control The US Economy?