The American debt is out of control, but America can afford it because of the American dollar.
The US debt will reach $30T in the coming months. This is a certainty. While this seemed hardly imaginable only ten years ago when the US debt was still “only” $14.3T in 2011, it is now unavoidable as it reaches $28.8T at the time of writing.
In only ten years, the US debt has thus increased by +101%.
This would not be so serious if America’s GDP had grown at the same rate over this period. However, this is not the case, since the US GDP has stalled. Over the same period the US GDP grew by “only” +46.5%:
Under these conditions, it is not surprising that America’s debt-to-GDP ratio has risen well above 100% and currently stands at 127%. The time when having a debt-to-GDP ratio above 100% was taboo is over.
Among the world’s major economic powers, it has even become the norm.
The American debt is divided into two main categories
The US debt is managed by the US Treasury Department through the Bureau of Public Debt. The debt is divided into two broad categories: intra-governmental holdings and debt held by the public.
Intra-governmental debt is debt that the U.S. Treasury owes to other federal agencies. Some agencies, like the Social Security Trust Fund, collect more tax revenue than they need. Instead of putting this money under a giant mattress, these agencies invest in U.S. Treasury bonds.
Currently, this intra-governmental debt is about $6.4T.
The debt held by the public is currently $22.4T, which gives us a ratio of about 78/22 between these two categories of debt. At the end of 2020, the breakdown of this debt by type of holder was as follows
As you can see, the share of foreign holders in US debt has been growing steadily over the past decade to reach $7.3T at the end of summer 2021.
Japan is the largest foreign holder of US debt
It is therefore interesting to analyze which countries are buying the most US Treasury bonds. The graph below allows you to better visualize this:
If China remains a big holder of the US debt with 14.16% of the total US debt held by foreign countries, Xi Jinping’s country has changed its strategy for a few years by deciding to stop increasing its exposure to the US debt.
The trend is towards a decrease in this exposure, which seems logical given the cold war that these two giants of the world are waging. Nevertheless, China still holds $1.068 trillion of US debt at the end of summer 2021.
Japan is the country most exposed to US debt in the world with an amount of 1,310 billion dollars, up +3% in one year. Japan holds 17.37% of the US debt held abroad.
Behind it, we find the United Kingdom with 539 billion dollars, then Ireland with $319 billion. Switzerland, Luxembourg, Cayman Islands, Brazil, Taiwan, and France complete the top 10 largest holders of U.S. debt.
In September 2021, the IMF reported that global debt now stands at $296T. This is an increase of +7% compared to the amount reached at the end of 2020, which stood at $277T. This figure, already worrying at the time, is even more so today. The global debt seems out of control right now.
Once the COVID-19 pandemic is fully under control, the world will likely have to face a debt crisis that is more than perilous.
If we consider this figure of the global debt, we can see that the American debt represents almost 10% of the global debt. If the situation remains worrying for America, it is probably less worrying than for countries with smaller economies than America.
Indeed, America remains by far the world’s leading economic power. Moreover, the US dollar, which remains the world’s reserve currency, allows it to live beyond its means by charging an exorbitant privilege to other countries in the world.
As long as America remains at the center of the current monetary and financial system, the situation can be controlled. If that were to change, we would have to be alarmed. But we are not there yet.