Who Owns the US National Debt?
The national debt of the United States continues to mount and currently stands at more than twenty-one trillion dollars. Understanding who holds this debt and why is important in our understanding of how the U.S. economy works. What are the motivations of each lender? Who is at risk of default if the debt cannot be repaid? In this article, we’ll look at the owners of the US national debt and how they affect its growth.
What is the US National Debt?
The US national debt is defined as the total amount of money that the federal government of the United States has borrowed from foreign investors, private citizens, and domestic entities. This money is generally repaid with interest, and the total value of the debt is constantly changing based on the amount of money that is still owed. The debt cannot be simply paid off with a lump sum payment; it must be repaid through a combination of taxes, inflation, and government spending cuts.
The US debt is treated as an asset by the federal government due to the interest that it earns from lenders. Governments are able to borrow money in order to finance large projects or to fund deficits when spending exceeds tax revenues. However, if the debt is not timely repaid, or if a recession or other market disturbance interrupts the flow of money, the creditor risks default.
Who Owns the US National Debt?
The US national debt is held by a variety of investors, both foreign and domestic. Below is an outline of the primary groups that currently hold the US debt by percentage of total ownership:
• Foreign governments and private investors: 35.7%
• Federal Reserve and intragovernmental holdings: 27.7%
• State and local governments: 17.1%
• Mutual funds: 13.9%
• Savings bonds: 3.2%
• Banks: 2.2%
• Pension funds: 1.1%
• Foreign banks, insurance companies and corporations: 0.6%
Foreign Governments and Private Investors
Foreign governments and individuals make up the largest portion of US national debt, owning more than a third of the total amount. China is the single largest foreign holder, with 1.1 trillion dollars’ worth of US debt, followed by Japan at 0.9 trillion dollars. Other major foreign holders include governments in the United Kingdom, Ireland, Brazil, Luxembourg, and Switzerland.
Foreign investors may choose to buy US debt for a variety of reasons. Some purchase it in order to diversify their investments or to hedge against losses in their domestic currency. Others, such as China, purchase US debt as part of their foreign exchange reserves, in order to increase their ability to purchase US goods and services, or to give themselves more leverage in international trade negotiations.
Federal Reserve and Intragovernmental Holdings
The Federal Reserve and other government agencies together make up the second-largest group of US debt holders. This includes pension funds, Social Security reserves, and other government agencies. The total amount of US debt held by the Federal Reserve is 0.7 trillion dollars.
These funds are commonly used to finance government programs, such as Social Security and Medicare. The funds are also used to purchase assets, such as Treasury securities, that allow the agencies to invest in the US economy.
State and Local Governments
State and local governments are estimated to own close to three trillion dollars of the US national debt, making up 17.1% of total ownership. This includes bonds issued by states and cities, as well as funds provided by pension funds or budget surplus funds.
State and local governments often borrow in order to fund infrastructure projects or to pay for services such as public education and healthcare. They may also borrow in order to cover deficits caused by shortfalls in tax revenue or unexpected expenses.
Mutual Funds
Mutual funds make up the fourth-largest group of US debt holders, with approximately three trillion dollars’ worth of US debt. Mutual funds typically purchase US Treasuries in order to diversify their portfolio, reduce portfolio volatility, and gain exposure to the US economy.
Mutual funds may also purchase US Treasuries in order to invest in inflation-protected bonds or to provide safety in times of economic uncertainty. By investing in US debt securities, mutual funds are able to gain a steady return on their investments without having to bear the risk of a sharp decline in the value of their portfolio.
Savings Bonds
Savings bonds are a type of US debt security that is purchased by domestic individuals. These bonds, which are backed by the full faith and credit of the US government, have a low risk of default, and are often used as a conservative investment for long-term savings.
Savings bonds are attractive investments due to their low-interest rates and level of security. Although savings bonds may not provide the highest return on investment, they can provide a steady return of income over the long-term, while avoiding the potential volatility of the stock market.
Banks
Banks make up the fifth-largest group of US debt holders, owning approximately 0.5 trillion dollars’ worth of US debt, primarily in the form of government bonds. Banks often purchase US debt as a way to invest their money and to take advantage of the low-risk, steady return that comes with investing in US debt securities.
In addition, banks are also required to hold larger reserves of US debt in order to meet regulatory requirements. Although banks generally prefer to lend money to businesses and consumers, they may also purchase US debt in order to maintain their required reseves.
Pension Funds
Pension funds make up the sixth-largest group of US debt holders, with approximately $230 billion of US debt. Pension funds are often used by large companies and institutions to finance retirement plans for their employees.
Pension funds typically invest in US Treasuries in order to diversify their portfolios and to take advantage of the low-risk, steady return that investing in US debt offers. In addition, pension funds may also invest in US debt in order to provide some protection against losses due to market volatility.
Foreign Banks, Insurance Companies and Corporations
Foreign banks, insurance companies, and corporations make up the smallest portion of US debt holders, representing just 0.6% of total ownership. These entities may purchase US debt for a variety of reasons, including diversifying their investments, hedging against losses, or as a way to invest surplus capital.
Understanding who owns the US national debt is important in understanding the US economy. Domestic and foreign entities alike purchase US debt in order to diversify their investments, to hedge against losses, or to finance government programs and projects. Regardless of their motivations, it is important to be aware of how public debt affects the US economy, and who will bear the consequences of any potential default.
