In 1989, New York real estate investor Seymour Durst spent $120,000 to erect a "National Debt Clock" in Times Square to track the exact amount of money that the U.S. federal government was borrowing to pay its bills. At the time, the country had run up a $2.7 trillion tab, but that figure seems almost quaint today [source: Stephey]. In 2008, the clock briefly ran out of available digits when the debt topped $10 trillion. By January 2013, the upgraded clock — it can now display up to a quadrillion dollars — registered $16.43 trillion and some change [source: TreasuryDirect].
Now, it's important to understand that U.S. doesn't owe that entire $16.43 trillion to its creditors, which is everyone that owns U.S. Treasury bonds and securities: individual American citizens, banks, corporations, state and local governments, and foreign investors. Treasury securities are essentially government-backed IOUs. In exchange for a cash loan, the government pays you interest. Only $11.56 trillion of the national debt represents the debt held by the public or public debt, the money the federal government borrows from outside sources to fund its budget. The other $4.87 trillion is tied up in intragovernmental holdings, mostly in the federal government's largest trust funds: Social Security and Medicare.
The question we want to answer today is: who actually owns that $11.56 trillion in public debt? And how does America's skyrocketing national debt rank against other industrialized nations? Find out in our global parade of America's biggest sugar daddies according to the U.S. Department of the Treasury.
Creditor Name: Hong Kong
Amount of U.S. Debt Owned (January 2013): $142.9 billion
Percent of U.S. Public Debt (January 2013): 1.2 percent
When British-occupied Hong Kong was handed back to the Chinese in 1997, the free-market enclave became a "special administrative region" of China [source: CIA World Factbook]. Hong Kong remains economically sovereign from China, but depends heavily on revenue from exports to the Mainland.
Hong Kong ships approximately 10 percent of its exports to the U.S., supplying some of America's largest national brands, including Wal-Mart and Target. The U.S., for its part, exports even more goods to Hong Kong in the form of high-value items like aircraft, spacecraft, diamonds, telecommunications equipment and computer processors [source: U.S. Dept. of State]. Because of its close economic ties to the U.S., Hong Kong's economy reacts quickly to American financial upturns, downturns and policy decisions. Like many foreign countries, Hong Kong invests in American debt because it is a reliable security held in the world's most stable reserve currency, the dollar. Sixty-two percent ($3.72 trillion) of the cash held in the world's central banks is in dollars [source: Cox].
Another reason so much U.S. debt is purchased in Hong Kong is because Hong Kong is a major Asian banking center. In fact, 20 percent of Hong Kong's GDP comes from the financial services sector [source: Garcia-Herrero]. That means that investors across Asia use Hong Kong banks to buy U.S. securities. As we'll discuss with our next country on the list, offshore banking makes it harder to tell who exactly owns the U.S. debt.
Creditor Name: Belgium
Amount of U.S. Debt Owned (January 2013): $143.5 billion
Percent of U.S. Public Debt (January 2013): 1.24 percent
We know what you're thinking: Belgium? Really? The gross domestic product (GDP) of this small European nation tucked between France, Germany and the Netherlands ranks No. 32 in the world, behind Nigeria and Malaysia [source: CIA World Factbook]. So why is Belgium one of the top 10 purchasers of U.S. debt?
The secret is something called "custodial bias" [source: U.S. Treasury]. Belgium has made a name for itself as one of Europe's most vibrant international banking centers. Like Switzerland, bank accounts in Belgium historically offered a high degree of secrecy, although that changed in 2011 when the Belgian government began disclosing account information to improve tax transparency [source: Hyslop]. Still, Belgium offers big tax breaks for foreign companies that create Belgian subsidiaries and benefits for investors who choose Belgium for offshore accounts [source: Henley].
Belgium's status as a tax haven makes it a popular place to buy U.S. debt, even if the investors aren't from Belgium. The U.S. Treasury tracks purchases of U.S. debt by geographic origin, not the specific nationality of the buyer [source: U.S. Treasury]. This is where custodial bias distorts the debt figures. Belgium is a custodian (or holder) of U.S. debt from investors living in nearby France and Germany or as far away as China and Japan. How much of that debt is owned by actual Belgians is difficult to tell.
We'll talk more about custodial bias with our next entry: teeny tiny Luxembourg.
Creditor Name: Luxembourg
Amount of U.S. Debt Owned (January 2013): $144.7 billion
Percent of U.S. Public Debt (January 2013): 1.3 percent
Luxembourg is smaller than Rhode Island, and it owns the equivalent of $281,046 of U.S. public debt per person. A nation of bankers, itsy-bitsy Luxembourg has the third-highest GDP per capita in the world at $80,700 in 2012, and it has no reservations about investing in other nation's cheap debt [source: CIA World Factbook]. Luxembourg's own economic stability is up for debate. While it owns $144.7 billion in U.S. debt, Luxembourg owes more than $2.15 trillion to its own foreign creditors. That ranks tiny Luxembourg at No. 11 on the global list of total foreign indebtedness [source: CIA World Factbook].
Like its neighbor Belgium, Luxembourg is a tax haven for wealthy foreign investors. For example, Apple has set up a "conduit" company in Luxembourg through which it funnels iTunes earnings to avoid higher U.S. taxes [source: Morgenthau]. Also like Belgium, investors from around the world buy U.S. debt through accounts based in Luxembourg. Since the U.S. Treasury doesn't distinguish between debt bought by bona fide Luxembourgians and debt bought by foreigners, Luxembourg's debt ownership figures may be artificially inflated.
Creditor Name: Russia
Amount of U.S. Debt Owned (January 2013): $162.9 billion
Percent of U.S. Public Debt (January 2013): 1.4 percent
In 2011, Russian Prime Minister Vladimir Putin denounced the United States as a "parasite" on the global economy [source: Chechel]. At the time, the U.S. Congress was embroiled in a debt-ceiling debate that many believed would result in a default on the government's loans from foreign countries. With hundreds of billions in U.S. Treasury securities, Russia had a lot to lose from a massive American default. But even the debt-ceiling debacle didn't scare Russia away from the relative security of American debt. Since the day Putin called America a "parasite," Russia has increased its holdings in American debt by tens of billions of dollars.
Where does Russia get all of its buying power? The answer is oil. Russia is the world's largest oil producer, and has used the commodities markets -- and investment in U.S. Treasury bonds -- to build impressive cash reserves in foreign securities [source: Iosebashvili]. Some world economists believe that Russia could be facing its own serious debt crisis by 2030, unless the country decreases spending. Bullish-minded ministers within the Russian government still urge growth, including huge infrastructure projects like the 2014 Winter Olympics and the 2018 World Cup.
Creditor Name: Switzerland
Amount of U.S. Debt Owned (January 2013): $192.7 billion
Percent of U.S. Public Debt (January 2013): 1.7 percent
Switzerland is a lot like Luxembourg, a small but incredibly wealthy European nation made famous as an offshore tax haven for wealthy investors. A stunning 27 percent of the world's privately held assets are managed by Swiss banks. In comparison, U.S. banks manage 8 percent [source: Federal Dept. of Foreign Affairs, Switzerland]. The Swiss enjoy high employment, longer-than-average life expectancy and rank among the happiest nations in the world [source: OECD]. The Swiss — or at least Swiss banks — are also one of the most reliable buyers of U.S. debt, routinely among the top 10 investors in U.S. Treasury securities.
The country may not hold onto its tax haven status for much longer, though. Thanks to a 2009 agreement between the U.S. Department of Justice, the IRS and the Swiss government, Swiss banks must disclose information about their clients and their holdings. In January 2013, a Swiss bank pled guilty in a New York court to conspiring with its clients to evade U.S. taxes [source: U.S. Dept. of Justice]. To avoid criminal charges, tens of thousands of Americans with secretive Swiss bank accounts have come forward as part of a voluntary disclosure program set up by the IRS.
Creditor Name: Taiwan
Amount of U.S. Debt Owned (January 2013): $196.6 billion
Percent of U.S. Public Debt (January 2013): 1.7 percent
This small island nation makes nearly all of its money exporting goods to Europe, the U.S. and China. So, when the world economy is good, the Taiwanese economy is very good [source: Shapiro]. But to hedge for the bad times, Taiwanese investors put their money in the safest securities in the world: U.S. debt.
Taiwan is a democracy with a constitution and a freely elected president. After World War II, the Communist party wrested control of the government from the Nationalist party and created the People's Republic of China. But many Nationalist leaders and sympathizers relocated to Taiwan, officially called the Republic of China [source: Bloomberg]. In essence, there were two Chinas. And the crazy thing is, there still are!
Both mainland China and Taiwan considered themselves the "one China," and the U.S. finds itself in awkward diplomatic territory. On one hand, America recognizes Mainland China as the "real" China, but it sells fighter jets to Taiwan. (Taiwan is also the fourth largest buyer of U.S.-made arms). In recent years, the relationship between Taiwan and China has warmed over the two nation's shared economic success. Money from Taiwanese investors has helped fuel the economic boom on the Mainland [source: CIA World Fact Book].
We should mention that the U.S. Treasury ranks "Caribbean Banking Centers" as No. 5 on its list, but since the position is held by six islands that hold almost exclusively offshore accounts, we're giving the spot to Taiwan.
Creditor Name: Brazil
Amount of U.S. Debt Owned (January 2013): $253.4 billion
Percent of U.S Public Debt (January 2013): 2.2 percent
Technically, "oil-exporting nations" are ranked as owning the fourth-largest chunk, or 2.3 percent, of American debt. That 15-country collective includes Algeria, Bahrain, Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Oman, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. But if we examine U.S. public debt on a country-by-country basis, Brazil wins the No. 4 spot handily [source: Congressional Budget Office].
According to the World Bank, Brazil is the world's sixth-largest economy. Its explosive economic growth has been fueled by aggressive investment by the Chinese. Starting in 2010, China signed lucrative trade agreements with Brazil to buy massive amounts of raw materials like iron ore and crude oil [source: Pomfret]. In addition to exporting natural resources, Chinese firms have built huge factories, farms and manufacturing plants on Brazilian soil.
After recording an impressive growth rate of 7.5 percent in 2010 — while the rest of world was still emerging from the recession — the Brazilian economy is finally showing signs of slowing. The growth rate for 2013 is expected to be a humble 3.2 percent, due in part to China's own cooling economy [source: Boyle].
Creditor Name: Japan
Amount of U.S. Debt Owned (January 2013): $1.12 trillion
Percent of U.S. Public Debt (January 2013): 9.6 percent
We've been talking a lot about America's debt problem, but how does U.S. indebtedness compare to other industrialized nations? The most useful debt measurement is to calculate the ratio of public debt to gross domestic product (GDP). At the end of 2012, U.S. public debt totaled 73 percent of GDP, meaning the U.S. borrowed the equivalent of nearly three-quarters of what it earned in 2012 [source: [source: CIA World Factbook].
Although a 73 percent debt-to-GDP ratio isn't ideal, it's a heck of a lot better than the situation in Japan, where public debt represents a mind-blowing 219 percent of GDP [source: CIA World Factbook]. How can the Japanese economy support such a lopsided debt-to-earnings ratio?
It turns out that Japan's debt, while incredibly high, is not unsustainable. The Japanese economy is still very strong. It boasts the world's fourth-largest GDP, and unemployment is below 5 percent. But the biggest difference between Japanese and American debt is that Japanese citizens own 95 percent of their country's debt, with only 5 percent in the hands of foreigners [source: Sauter]. In contrast, around 47 percent of U.S. debt is owned by foreign investors, a far riskier proposition.
Another reason the Japanese economy remains so stable is that Japan is heavily invested in U.S. debt securities, some of the most financially sound investments in the world. The only foreign country that lends more money to America is Japan's massive neighbor to the West, and No. 2 on our list: China.
Creditor Name: China
Amount of U.S. Debt Owned (January 2013): $1.26 trillion
Percent of U.S. Public Debt (January 2013): 11 percent
With 1.3 billion people, the world's second-largest economy, and the fastest economic growth among industrialized nations, China is an undisputed economic powerhouse [source: World Bank]. China is also the foreign country that owns the most U.S. debt, breaking the trillion-dollar mark in 2011 and never looking back [source: CBS News]. The question is: is it bad for the U.S. economy or national security that one of America's biggest rivals owns more than 10 percent of its debt?
You might compare it to the arms race between the former Soviet Union and the United States during the Cold War. Sure, either side could have launched its warheads and inflicted terrible damage on the enemy, but an act of aggression would have ensured an equally punishing retaliation.
If China wanted to economically injure the U.S. by selling off its debt securities, the result could be dramatically higher interest rates and a steep devaluation of the dollar. But the Chinese would also shoot themselves in the foot. The Chinese have close to half of their cash reserves invested in U.S. debt [source: Davidson]. For China, it's the safest, best investment the growing nation can make. China's economic growth is fueled partly by the return on their U.S. investment. Poisoning the dollar would take the yuan right down with it [source: Capaccio].
Creditor Name: American Public and State and Local Governments
Amount of U.S. Debt Owned (January 2013): $4.14 trillion
Percent of U.S. Public Debt (January 2013): 36 percent
Surprise! The country the United States is most indebted to is ... itself. Actually, the federal government borrows from a host of domestic investors, including private citizens, banks, corporations, local and state governments, and investment funds. Here is a breakdown of the top domestic investors in U.S. public debt as of September 2012, the latest figures available [source: Financial Management Service]:
- Insurance companies: $263.8 billion
- Depository institutions (commercial banks, credit unions): $337.4 billion
- State and local governments: $492.2 billion
- State and local government pension funds: $190.3 billion
- Private pension funds: $615.6 billion
- Mutual funds: $889.1 billion
- U.S. savings bonds: $183.8 billion`
- Other investors (Includes individuals, government-sponsored enterprises, brokers and dealers, trusts and estates, businesses, and more): $1.172 trillion
Why would individual Americans, businesses and local governments continue to loan money to the United States? Doesn't it seem risky to put money into an institution that's already $16 trillion in the hole? Believe it or not, investing in the government isn't a high-risk proposition. While the federal government is hemorrhaging thousands of dollars by the second in order to pay interest on its debts, the U.S. has a vested interested in not defaulting on its loans. America's credit rating would drop. and the booming market for U.S. debt could dry up. How would the U.S. government function without its international credit card? Let's hope we never find out.
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Author's Note: Top 10 Countries the U.S. Owes Money To
Sorry to burst anyone's bubble, but the National Debt Clock is never going to reverse course. It is a hard fact to swallow, but the United States — like all industrialized nations — has always borrowed to pay its bills. From my research to update this article, it looks like most economists agree that the most important figure to watch is the debt-to-GDP ratio. The $16.43 trillion figure is incomprehensibly large, but that will continue to get larger. The more important question is, can the U.S. keep its economy growing faster than its debts? The Congressional Budget Office warns that current tax and spending policies will grow the national debt to 77 percent or higher over the next decade. The CBO warns that sustained high levels of debt will have "serious negative consequences," including the possibility of defaulting on interest payments. It's an unrealistic goal to stop borrowing. Instead, the focus should be on investing that borrowed cash in the right programs and people to ensure long-term economic growth. – D.R.
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