Bush Administration Increasingly Relies on China and OPEC to Finance U.S. Debt, Report Shows

Nov 2, 2006 Issues: Debts and Deficits, Economy

WASHINGTON, DC - The Bush Administration has allowed the United States
to become increasingly dependent on foreign purchases of U.S. Treasury
securities to finance the federal budget deficit, and future U.S.
national income will be depressed by payments to foreign holders of
U.S. debt, according to a new study by Democrats on the Joint Economic
Committee (JEC) and the House Committee on Financial Services.

“If the United States does not begin to take steps to reduce its
unsustainable dependence on foreign borrowing in an orderly way, there
could be a run on the dollar and that could precipitate an
international financial crisis and a sharp increase in interest rates,”
the report warned.

Sen. Jack Reed (D-RI), Ranking Democrat on the
JEC, Rep. Carolyn Maloney (D-NY), Senior House Democrat on the JEC, and
Rep. Barney Frank (D-MA), Ranking Democrat on the House Financial
Services Committee, today released the report, Relying on the Kindness
of Strangers: Foreign Purchases of U.S. Treasury Debt.  Key findings
from the study include the following:

  • At the end of fiscal
    year 2005, 42.1 percent of the public debt of the United States was
    held by foreigners, including foreign governments.  That foreign
    ownership share rose by 11.8 percentage points just since 2001 and will
    be higher still when the data for 2006 are released.
  • Foreign
    ownership of Treasury securities more than doubled from $1.0 trillion
    in January 2001 to $2.2 trillion in August 2006.  China’s holdings rose
    450 percent, from $61.5 billion to $339 billion.  The OPEC nations have
    doubled their holdings to over $100 billion in the past two years.
  • The
    fiscal discipline of the 1990s put a halt to rising federal debt and
    rising foreign-ownership, but both have grown since 2001, with foreign
    holdings growing faster than the overall public debt.
  • Since
    2001, foreign purchases of U.S. Treasury debt have almost certainly
    contributed to keeping interest rates lower than they otherwise would
    have been in the face of large federal budget deficits, but the United
    States must reduce its heavy dependence on foreign borrowing in order
    to avoid a run on the dollar and a steep rise in interest rates.
  • Even
    without a run on the dollar, the need to pay interest of $100 billion
    or more per year on foreign holdings of Treasury securities will reduce
    U.S. national income.

“Our reliance on China and other
nations to finance our debt is the result of a deliberate policy by the
Bush administration, one that reversed course from the Clinton
administration and has favored deficit financing of tax cuts and
federal spending over a prudent fiscal policy. It will take years of
sound fiscal policy to reduce our reliance on foreign lenders and
return the federal debt to a prudent level,” the report concludes.

Report link: http://jec.senate.gov/democrats/Documents/Reports/foreigndebtkindnessofstrangers.pdf

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