Economic issues have a concrete impact on any country’s domestic policy. The problem is that world economies are so intertwined that their relationships and any issues arising from these relationships sometimes have an adverse impact on how governments formulate and implement policy. The U.S. policy has had its share of such adverse consequences, the most prominent being the country’s dependence on foreign oil and, more recently — and more importantly — its dependence on foreign debt financing.
According to the latest data posted on the U.S. National Debt Clock, foreigners own about $3.98 million of U.S. Treasuries. China and Japan own most of them, holding $900 billion and $795 billion, respectively. Year-over-year, foreign ownership of U.S. Treasuries rose almost 20%, faster than the U.S. government could issue them at a rate of 15.6%.
Why is the U.S. selling its debt faster than it can print it? The short answer is that domestic savings are so low they are almost non-existent. Relying on the statistics posted on the Debt Clock, average savings per every man, woman and child in America is a measly $1,058!
Expressed as a percentage of GDP, some 30 to 40 years ago Americans were saving between five percent and seven percent. In the past 20 years, that rate has dropped to somewhere between one percent and three percent; although, in the wake of the Great Recession, the savings rate has improved slightly. Still, unless interest rates start rising, Americans have no real reason to start saving more aggressively. And, given the Fed’s policy on interest rates, it is unlikely that we will see them going up anytime soon.
The picture of the U.S. overall savings is just as bad as that of Americans’ personal savings. Total savings of any country are comprised of consumer and corporate savings, plus government surpluses. In early 2009, just as the Great Recession came for its proverbial pound of flesh, U.S. total savings expressed as a percentage of GDP entered negative territory for the first time since 1952.
Why so much difficulty saving money? Why the accumulation of so much debt? Well, saving money in the U.S. is not a simple matter of having the will to save. It is primarily the consequence of the country’s overall inability to finance itself via domestic means. The U.S. government is currently operating with a monster of a budget deficit, the size of which has grown to $1.44 trillion at the latest count, or more than 10% of GDP. This also means that the government does not have enough money to finance itself, which is why it has to rely on foreigners to buy the Treasuries and pay for them with actual money.
There is no other way of putting it: dependence on foreign debt financing represents a serious economic and strategic risk for the U.S. According to the Congressional Budget Office, the U.S. will need to run the deficit until at least 2035, because the government savings rate is negative and foreign debt financing might be the only thing keeping it from bankruptcy.
What can make a dent in the U.S. reliance on foreign financing through debt? There are several ways, such as increasing the savings rate on all levels: consumer; corporate; and government. The government would also need to increase taxes and use that revenue to pay down the deficit. The U.S. government should also introduce aggressive austerity measures.
The alternative is grim. Being a long-term debt nation will start — and possibly already is — shaping U.S. policy. It could mean that our largest creditors could be in a position to tell us what to do and dictate what role we play on the international stage and how we conduct ourselves on that stage. That risk of being indebted as a nation to other nations was not lost on the Founding Fathers. It was Thomas Jefferson who said it that, “To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude. Our properties within our own territories should not be taxed or regulated by any power on earth but our own.”