The story of US debt
The United States holds the largest trade deficit in the world. A trade deficit arises when a country imports more goods and services than it exports. The US economy has had a trade deficit for more than four decades and continues to increase the deficit every year. The trade deficit in 2016 was reported at $502 billion. Recently, the monthly trade deficit hit a five-year high of $50.5 billion for November 2016. To fund this deficit and run the US economy, the US government borrows from external creditors by issuing debt. This cycle of borrowing has continued for decades and has resulted in a ballooning of US debt to foreign countries.
Which countries hold US debt?
China (FXI) and Japan (EWJ) hold the highest percentage of US debt, according to the latest data reported by the U.S. Treasury. Countries with surplus reserves that have been increasing because of the trade surplus with the United States park these surplus amounts in US debt. In a way, they’re lending money to the United States to purchase goods from them. That keeps demand for exports from their countries at a healthy level and helps their economies grow. In the last two decades, China has enjoyed a spike in exports, and its economy has grown at an annual rate of 10%.
Implications of external debt
Foreign countries understand the benefits of holding US debt (DLBL) since it helps their economies grow. On the other hand, importing goods from foreign countries make it cheaper for US consumers to purchase products. That, along with a higher demand for US government (GOVT) debt, keeps interest rates (BND) low in the United States. A lower interest rate in the United States would help US companies get access to cheaper financing, improve their businesses, and create more employment for US citizens. That arrangement has worked well until recently. Higher ownership of US debt is increasing China’s economic power over the United States.
In the next part of this series, we’ll explain why China holds such a high amount of US debt.