Who Owns US Government Debt? Mostly America

With the election too close to call and therefore the next level of government stimulus spending still unknown we thought it would be a good time to review who holds US government debt as there will eventually be more of it coming.

As seen in the chart below, it is mostly Americans and American institutions that own US debt. Foreign governments hold about 26% of US debt and that is often in the form of currency reserves in 'central banks' (their version of our US Federal Reserve Bank - Fed) from global trade where many transactions settle in $US. The US is considered the world's most stable economy and therefore many central banks and foreign investors hold US debt for its safety.

About 40% of the US debt held by American individuals and institutions and 17% held by US government entities, so a large portion is a debt we owe ourselves. Social Security and the Civil and Military Retirement Funds buy government debt with the cash they receive to fund future retirements and will sell them when the cash coming in is less than the cash going out. The big change over the last decade or so has been the US Federal Reserve Bank (Fed) buying US debt to dump 'dollars' into the economy and provide liquidity for the US markets and the US banking system. We should expect given the Fed's policy statements that they will continue to be buyers of US debt and the percentage they own will grow from 16.5% to 20%. The Fed is required to 'disgorge' its profits to the US Treasury, so the vast majority of the interest payments made to them come back to the US government which does lower the cost of the debt. As US debt grows there is some concern we could reach a point of saturation where the regular buyers of the debt no longer need or desire to hold it and the Federal Reserve loses credibility due to the vast amount it holds. We are not there yet, and likely not even close to that point, but as spending increases, both for the Covid stimulus and in the normal course of federal budgets it is something to look at, at least occasionally.

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