Academic journal article ABA Banking Journal

Are Foreign Holdings of U.S. Securities Too High?

Academic journal article ABA Banking Journal

Are Foreign Holdings of U.S. Securities Too High?

Article excerpt

THE COMMON PERCEPTION IS that the U.S. is financing its current account deficit by a massive build-up of debt that leaves the country vulnerable to rising interest rates. A look at the numbers tells a different story.

The chart demonstrates that the value of foreign holdings of U.S. securities rose from $6.9 trillion on June 30, 2005, to nearly $7.8 trillion on June 30, 2006. The value of U.S. stocks held by foreigners rose by nearly $300 billion last year to constitute roughly one-third of total foreign holdings of U.S. securities. Therefore, one-third of U.S. obligations to foreigners are not sensitive to changes in interest rates. In addition, long-term debt, which is defined as debt securities with original maturities of more than one year, constitutes the vast majority of total debt outstanding. Thus, income payments to foreigners that are made by the U.S. to finance the current account deficit are not extremely sensitive, at least in the near term, to rate changes.

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Another common perception is that the U.S. finances its current account deficit by selling Treasury bonds to foreign central banks, mostly in Asia. According to an extreme version of this view, the Chinese central bank will soon "own" the U.S. Government.

Actually, foreigners owned $1.7 trillion worth of Treasury notes and bonds last year, which represents more than 50% of the long-term marketable Treasury debt outstanding. When stripping out the amount owned by the foreign private sector, however, the amount of Treasury securities held by foreign central banks falls to $1.2 trillion, roughly one-third of the total amount outstanding. Of this amount, China's ownership of Treasury securities totals $364 billion, a bit more than 10% of the total marketable debt--a long way from "owning" the U. …

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