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Who Holds U.S. Debt?

As the “debt debacle” continues to unfold and increasingly exasperate the U.S. population, I have heard a wealth of misinformation about the national debt.  One of the most common misconceptions is that “China is the largest holder of U.S. debt.”  Although they are the largest foreign holder of our debt, they are certainly not the largest overall holder.  The illustration below is the most recent revised data from the U.S. treasury.  Current as of late 2010.

 

The largest overall holders of U.S. debt are the American public and institutions, and the social security trust fund.  Of these American holders, the federal reserve holds 966 billion of the debt, or ~7.2%.  Interestingly, this is less than China’s overall holdings.  Of course, much of China’s massive explosion of wealth has occurred in a time of financial unrest across the world and China has taken their cash reserves and put them in the “safest” investment vehicle in the world: U.S. debt securities.

NeilS – Considering this information, what would a U.S. default mean?  I suppose that is a loaded question and nobody really knows what would happen, but from the above data we can see who we would default to.  As our politicians in Washington continue to play a never ending game of tug-of-war and send markets reeling, people rarely mention that the biggest creditor to the United States are Untied States citizens and institutions which comprise 60% of total holdings.  So if the U.S. defaults, it is defaulting mainly to itself.

Although the technical definition of default is to not pay interest due to creditors, I believe that simply rearranging the treasury payout schedule would still lead to a default of another kind.  If we prioritize interest payments above social security, military pay, medicare, and everythign else we owe, are we not defaulting to those individuals?  In my opinion, a triple A rating means you can pay all your bills, not just the interest on your debt at the expense of other outlays.

 

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