Why Deficits Matter: The International Dimension

The Issue

Foreigners account for about $2.2 trillion, or a little over half, of the outstanding total of $4.3 trillion of US Treasury securities held by the public. Official institutions, mainly central banks, account for about 60 percent of this total. In addition, foreigners as a whole probably hold close to $1 trillion, or about 15 percent, of US government agency securities (see tables 1 to 4).

These totals and ratios have risen rapidly over the past 20 years. From 1985 to 2005, foreigners acquired almost 75 percent of the overall increase in outstanding treasuries. From 1995 to 2005, domestic holdings actually fell while foreign holdings grew by twice the aggregate increase. Since 2001, foreign purchases of treasuries have accounted for most of the rise in the total outstanding.1

These data raise the obvious question of whether the United States in general and the US government in particular have become excessively dependent on foreigners to finance our domestic economy and indeed our federal budget. The ultimate concern is whether these holders, or perhaps some subset of them such as foreign governmental institutions, might precipitate a financial crisis by rapidly selling off large amounts of treasuries for economic or even