Just after the 2010 elections produced a new balance in Washington, as the House went from a strong Democratic majority to an equally sturdy GOP one, as the Senate added new members who carried the mantle of the Tea Party (Sen. Rand Paul) and the Club for Growth (Sen. Pat Toomey), there was talk of the debt ceiling. Would these hard charging conservatives vote for an increase in government’s ability to borrow? That question would kick-start a national debate over the deficit, and many months later, we are staring both at that very debt ceiling and the possibility of an over-arching reduction in spending.
With all the talk of debt obligations, default, markets crashing and general economic collapse, came the notion that the debt issue needed to be resolved not just for fiscal reasons, but for geopolitical ones. It was common to hear insinuations that foreign governments were collecting American debt and storing it away, weakening our economic power as we leveraged ourselves more and more. We signed up for a VISA card from the Bank of China, and we maxed it out, so we are told. But that is totally incorrect.
Well, it’s 92% incorrect.That’s because the debt to ourselves, over $9.747 trillion, is eight times the amount we owe China. The Chinese actually own about 8% of American debt, compared to the nearly 68% of the debt held domestically. Not to say that the $1.16 trillion we owe China isn’t real money. To be sure, the overall amount the U.S. is in debt to other countries is large: we owe $4.595 trillion of the overall $14.343 trillion to foreign states.
China is actually the third biggest individual creditor to the U.S., behind the Social Security Trust Fund and the $2.67 trillion the government owes it, and the $1.63 trillion in Treasuries the Federal Reserve has purchased, many through a process called “quantitative easing,” used to increase the money supply in the financial system and subsequently stimulate the economy. Business Insider did a great rundown of the top holders of our debt, and right behind China is U.S. households with $959.4 billion in holdings. And so on.
This is important because it’s not only a narrative that’s been pushed for political gain but has manifested into policy ideas. In February, Sen. Pat Toomey introduced a largely rejected plan to “Pay China First,” which would entail literally sending large checks to foreign governments and large financial institutions at the expense of domestic responsibilities in the event that the government failed to raise the debt limit.
And of course, it’s been a political message for some time now. Rep. Michele Bachmann (R-MN), before she officially declared for president but out courting conservative support none the less, made a joke at CPAC about the Chinese government holding American debt, saying with all that debt, “Hu’s your daddy,” referring to Chinese President Hu Jintao. China gets singled out in television ads railing against the debt. Or it’s the entire focus of an ad, Chinese Army included.
Casting the Chinese government as the economic bogeyman is unlikely to stop as long as it’s an effective tactic. But the debt to China, while a significant portion, is much more talked about than the numbers numbers bear out. Certainly much more than 8%.