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March 06, 2009

Will foreign investors dump our debt?

It's well known that foreign investors own a substantial slice of our federal or national debt. This raises two important questions. How much to they own, and second, will there ever come a time when they won't want to buy our debt?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, regarding the first question, if you take all foreign owners together, they currently own about half of the total national debt. The biggest owner is China. They have a 10 percent share, followed by Japan at just under 10 percent and the United Kingdom at 6 percent. Now recently the federal government has had no problem at all selling its debt. In fact, during this financial crisis, which is really worldwide, investors around the world, I think, see the U.S. as a safe haven for parking their money, and they've been doing that. And so interest rates on federal debt have gone way down, and the federal government has had no problem selling that debt. I do think, however, we need to look at the long run. I don't think it's a matter that we'll see some country in the future all of a sudden dump our debt, simply because that would hurt them. That would send the value of those debts down, and they would get less money for them. But I think we do need to worry about the capacity of foreign investors to continue to buy so much federal debt. And I think one thing that foreign investors will look at will be whether we can address our federal spending and the levels of our debt once the recession is over."

Posted by Dave at March 6, 2009 08:00 AM