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Three Key Questions About US Debt

 January 23, 2012 03:57 PM

As the US debt ceiling closes in on its 105th increase in 94 years, investors' concerns over the US's debt load are returning to the fore. But are these concerns well-founded? The answers to these three common questions may provide surprising insight.   

Who owns the US's debt?

Many assume foreigners—namely, China—own the lion's share of outstanding US debt, prompting fears they could use their position to extract political concessions. Or, more simply, that other nations somehow "own" the US.

In reality though, most US debt is owned domestically—by individual investors, institutions or the federal government. As shown in Exhibit 1, less than one-third of US debt is held abroad. China may be America's largest foreign creditor, but it holds a paltry 8%. Very little US debt is subject to the political whims of China's communist leaders.

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Exhibit 1: US Debt Ownership, by Country

Source: US Department of the Treasury; as of 8/31/2011.

Does the US have too much debt?

On an absolute basis, the US's outstanding debt might seem huge—over $15 trillion! However, that eye-popping number doesn't mean much without any additional context. Recall, the government itself owns bonds representing approximately 32% of federal debt. This portion is both an asset and liability of the federal government—meaning it effectively cancels itself out. Thus, it's better to consider net public debt. And today, US net public debt amounts to $10.9 trillion.

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That number probably still sounds huge. But our GDP of $15.2 trillion also sounds huge. When considering large numbers, it's always critical to consider them in context and scale them. As a percentage of GDP, America's net public debt is 72%. Now we can consider whether this amount seems problematic using an appropriate historical frame of reference.

Exhibits 2 and 3 plot the US's and UK's net debt as percentages of GDP over time. For much of the 18th and 19th centuries, Britain's debt load was double (or more) America's today—regularly above 150% and peaking above 250% of GDP. Throughout this time, Britain remained the global economic and military superpower. Its expansion was unprecedented. The industrial revolution began in England, and decades of leading innovation in manufacturing ensued. If the UK could afford vastly more debt then, the current level of US debt shouldn't automatically be considered too high.

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