It wouldn’t be right to let much more time pass before reporting on the new numbers from the Treasury Department showing how much in the way of U.S. government debt is held by foreigners, including by foreign central banks and other arms of foreign governments.
These monthly data sets are closely followed by finance geeks and some trade specialists because they shed light on critical economic questions (mainly, how much longer the rest of the world will keep on funding America’s habit of living beyond its means) and national security questions (how much influence over U.S. politics and policy might be wielded by creditors whose primary interests are not the well-being of the American people).
That economic question has loomed especially large because even though most outstanding debt is held by Americans themselves, there’s legitimate concern that foreign lenders own than enough to affect interest rates. More specifically, many American leaders and analysts have worried that overseas interests may tire of lending ever more money to an economy that keeps going ever deeper into the red, and will at least start demanding more compensation (i.e., higher rates) for the greater risk they’re being asked to assume.
That kind of tightening would almost certainly slow an already historically sluggish U.S. recovery. Yet if the Federal Reserve held rates steady and simply printed more money to fill the gap, the U.S. dollar could start weakening dangerously, and inflation in America could genuinely take off.
The good news contained in the new Treasury figures is that foreign lenders are more than happy to let Americans’ consumption party continue. Of course, if you’re worried that profligacy can’t indefinitely serve as a national business model, and that continuing huge U.S. international deficits keep threatening to trigger a repeat of the last global financial crisis, that’s also the bad news.
As of August, total foreign holdings of America’s official debt bounced back from a July dip to hit an all-time high of just over $6.066 trillion. Foreign government holdings kept rising month to month, too, and also hit a new record – just over $4.157 trillion.
The figures on some individual countries’ U.S. official debt holdings are noteworthy, too. China is now America’s biggest foreign creditor, which is worrisome in part because of its increasingly aggressive foreign policy in the East Asia Pacific region. It bought $4.8 billion in American government debt in August and raised its holdings to just under $1.270 trillion. That’s below the monthly record Chinese lending hit of nearly $1.317 trillion in November, 2013, but not very far below. In fact, this lending has remained around $1.270 trillion ever since. So there doesn’t seem to be much evidence that Beijing’s stated desire to see its yuan assume a more important role as an international reserve vis-a-vis the dollar is leading it to unload greenbacks.
France has bitterly complained about the dollar’s global predominance for decades, including recently. But France’s dollar holdings also rose in August after dipping in July, and are up more than 13.60 percent since last August. The BRICS countries (Brazil, Russia, China, India, and South Africa) say they’re so upset about the dollar’s “hegemony” that they’ve formed their own development bank. But as a group, the non-Chinese members steadily keep buying dollars, too.
If there has been a valid reason for concern about foreign dollar buying, it comes from taking a longer perspective. Since March, foreigners’ overall U.S. Debt holdings have increased an average of 6.18 percent year on year. That’s a bit less than the 6.71 percent average for the comparable 2012-13 year-on-year increases. But it’s less than half the 12.74 percent average from 2011-2012.
At the same time, clearly U.S. investors have more than stepped in, and helped keep U.S. Treasury yields low. Moreover, these new August figures precede September and October, when global worries about rising geopolitical tensions and slowing growth in China and Europe in particular triggered a major flight into dollars that pushed the exchange rate way up and interest rates another leg down. Unless foreign investors almost completely avoided the temptations of the dollar’s well established safe haven status, expect the next few sets of monthly Treasury figures to show their dollar holdings strongly on the rise again.