The ownership of U.S. debt is shifting abroad.
Why is no one worrying?

The foreigners are coming! Well, actually, they're already here. Foreign ownership of the federal government's debt, minimal for most of U.S. history, has shot up to a record peak (27%). And an increasing proportion of that foreign ownership is by central banks, i.e., arms of foreign governments.

At the same time, American ownership of U.S. Treasury notes and bonds by the Federal Reserve, commercial banks and households has been plunging. Recently it was at 72%, its lowest ever. As James A. Bianco of Barrington, Ill.- based Arbor Trading commodities brokers points out, in effect foreign central banks financed all of last year's federal deficit. By contrast, foreign central bank financing of the federal deficit never quite reached 50% during the 1980's and was usually much lower.

So what? So those critics of Ronald Regan's supply-side boom who complained it was just sneakily borrowed from foreigners were full of it, is what. Where are you now, Harvard Professor Benjamin M. Friedman, author of Day of Reckoning (1988), arguing that Regan-era foreign borrowing inevitably meant American incomes would stagnate, even fall?

(Still in Cambridge, Mass. He tells FORBES that it's "a good question" why the foreign debt issue is no longer discussed.)

FORBES, by contrast, has always maintained that Washington's borrowing from foreigners is not a problem. Apart from anything else, the debt is denominated in U.S. dollars. It can always be inflated away. Foreigners are being heroic to take the risk. However, there are some implications when the government finances itself heavily in this way.

(Reprint, FORBES, March 24, 1997 edition)

Copyright © 1996. The Light Party.

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