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The US Debt Ceiling, Treasury Securities and Foreign Policy

Reaching the debt ceiling affects U.S. economic and public policies, but its effects will also matter to foreign investors. According to the U.S. Treasury, foreign investors – whether they are governments or private actors – own more than 7 trillion dollars in Treasury securities. Such a high percentage of foreign ownership makes defaulting on the U.S. national debt an issue highly relevant to U.S. foreign policy.

Who Are the Largest Foreign Investors in US Treasury Securities?

Currently, Japan is the largest foreign investor with over a trillion dollars. China is in second place with 870 billion dollars.

The United Kingdom is third with 645.8 billion, and Belgium is fourth with 332.9 billion. Looking at Treasury data over time, it is also clear that China has lowered the amount of its investment, and those securities have been picked up by other countries over the past year.

Other Countries Consider US Treasury Securities a Safe Investment 

Why do foreign countries buy U.S. Treasury securities? The answer is simple. It’s a safe investment and generates a steady income in interest from the strongest economy the world has ever known.

It is also unlikely that the U.S. government will default on its loans. According to Bloomberg,  Japan uses money in its government pension system to buy these Treasury securities and to support the payments for its very large retirement-age population.

As an avenue for investment, this strategy makes sense. After all, the U.S. government is a steady debtor that always pays its bills on time. The investment is secure and on some securities, the interest rates are quite good. So why should the U.S. care who buys its securities?

For countries like China, there are strong economic reasons for investing in U.S. Treasury securities. According to ChinaPower, the research group for the Center for Strategic and International Studies, “China buys U.S. debt for the same reasons other countries buy U.S. debt, with two caveats. The crippling 1997 Asian Financial Crisis prompted Asian economies, including China, to build up foreign exchange reserves as a safety net. More specifically, China holds large exchange reserves, which were built up over time due in part to persistent surpluses in the current account, to inhibit cash inflows from trade and investment from destabilizing the domestic economy.”

[Related article: Entitlement Spending Is the True Cause of the Rising National Debt]

Debt Ceiling: Treasury Securities Could Be Weaponized, But That Is Unlikely

There is the possibility that these Treasury securities could be weaponized. For instance, China could dump a significant number of its securities to the market in a short period of time. That action would drive the price down, and as a result, the U.S. interest rate will go higher.

Although that situation is possible, it is unlikely that China would risk this action. Also, U.S. allies around the world could buy those securities (think British, French, and German central banks). In addition, the U.S. Treasury can buy its own Treasury securities.

But even if this situation is unlikely, foreign investment says something about the U.S. economy and U.S. influence in the world today. As ChinaPower aptly explained, “China’s large U.S. Treasury holdings say as much about U.S. power in the global economy as any particularity of the Chinese economy.

“Broadly speaking, U.S. debt is an in-demand asset. It is safe and convenient. As the world’s reserve currency, the U.S. dollar is extensively used in international transactions. Trade goods are priced in dollars and due to its high demand, the dollar can easily be cashed in. Furthermore, the U.S. government has never defaulted on its debt.”

Last year, NPR covered the reduction of Chinese investment. NPR repeated the narrative that if foreign investors do not buy U.S. Treasury securities, the interest rate will rise and perhaps foreign countries will try to use the securities to hurt the U.S. economy. NPR concluded by reiterating that Treasury securities are not weapons, but a statement of faith in America’s future.

America’s Image Abroad Is Connected to the US Economy and Debt Ceiling

In other words, foreign perception of the U.S. and its power – both economic and political – is connected to these Treasury securities. If the U.S. defaults on its national debt, then the political message is that the U.S. is losing its strength.

This change to the international status of the U.S. is a dangerous message to send around the world. Think of Russia after its abysmal performance in Ukraine; Putin’s international stature has weakened significantly.

It seems that both parties of Congress will need to come together and reach an agreement over budget cuts. Ideally, reducing the debt ceiling will be achieved in a quick, efficient manner.

Ilan Fuchs

Dr. Ilan Fuchs is a scholar of international law and legal history. He holds a B.A. in Humanities and Social Science from The Open University of Israel and an M.A. in Jewish history from Bar-Ilan University. Ilan’s other degrees include an LL.B., an LL.M. and a Ph.D. in Law from Bar-Ilan University. He is the author of “Jewish Women’s Torah Study: Orthodox Education and Modernity,” and 18 articles in leading scholarly journals. At the University, Ilan teaches courses on international law while maintaining a law practice in several jurisdictions.

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