U.S. Debt: How Serious is It?

The national debt and its growth are much in debate lately due to Trump’s and republicans’ new tax plan, which is estimated to add up to $1 trillion to the national debt if it passes. But how much does the U.S. really owe foreign nations?

Foreign investors - including governments - owned $6.25 trillion. That’s more than a quarter of the total U.S. debt at the end of last July. Chinese investors were the largest foreign holders of US debt at $1.1T, followed closely by investors from Japan.

The increasing role of foreign investors is a shift from earlier decades, when most U.S. debt was owed domestically. “If foreign demand suddenly changed, the U.S. would be vulnerable” said Karen Dynan, a Harvard economist who served in the U.S. Treasury Department under the Obama administration.

"Anything that could produce a sharp swing in that demand could have the potential to raise rates on our debt in a way that would make our fiscal position worse," she said.

Is an American 'Suez moment' waiting in the wings?

Though we’re hesitant to admit it publicly, China and Japan already hold so much American debt that, theoretically, each could exert enormous leverage on American foreign policy, which would cause our own embarrassing Suez crisis.

Higher interest rates for the government would hit the private sector, raising costs for borrowing. That could also have geo-political repercussions.

The UK faced a similar dynamic in 1956, during the Suez Crisis, when it wanted to take military action after Egypt nationalized the Suez Canal Co. At the time sterling was under pressure, but the U.S. refused to provide help unless the UK ceased the military action.

However, the U.S. dollar retains a tenuous position as the linchpin of the global economic system for now. Economists say the U.S. doesn’t ever need to pay its debts back entirely, so long as the economy keeps growing enough to cover the payments.

But because of the risks, they point out, it's prudent to reduce the current load. Which is a major reason why an increase of $1T in the new tax plan is so disconcerting.

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