There’s a lot of talk in politics about the monstrous problem of China, our chief global rival, holding a ton of our debt. It’s only a matter of time until it calls that in and brings America to its knees, after all.
The problem is the narrative is, at best, complicated.
The U.S. government does have a lot of debt: Just a little less than 20 trillion dollars of it. Almost all of that is in bonds issued by the Treasury Department. Essentially, people pay the government a set amount of money up front. They then receive payments exceeding that value down the road. They’re usually viewed as a safe investment, which makes them popular with those wanting low-risk profits. Like the Chinese government.
So, yes, China holds a lot of our debt. But definitely not a majority. In fact, it owns less than ten percent. Most of our debt is held by private citizens, corporations or the federal reserve system. They also couldn’t exactly call in their debt and demand we pay all of it then. We already agreed to give certain amounts at given dates, regardless of who held it. Sure, China could sell the debt. But then someone else would buy it, and we’d just give money to them at the set dates. The fact that China holds it isn’t terribly significant in and of itself.
Now, there are problems with borrowing large amounts of money. It might reduce private investment, and it means we’ll have to make large interest payments later. Furthermore, if there are doubts about our ability or willingness to pay off the debt, like if Congress declined to raise the debt ceiling and triggered a default, that would be bad. The security of our loans would be viewed as suspect, and people would want more interest money to make up for the risk.
Relying on China also has problems. Its government is shifting away from low-return investment abroad and toward consumption spending at home. As such, the U.S. will need to find other borrowers in the future who are willing to pay higher rates than the Chinese currently are.
But the risk of China ruining us through debt is greatly overblown. It runs afoul of basic financial concepts, such as how debt actually works. Most people trying to raise fear about that, such as the Republican presidential nominee, apparently either don’t know or care how the basics of the economy work. That should bother you.