Despite their low yields, foreigners remain enamored with US Treasury securities. Net purchases of Treasury securities by the foreign private sector totaled $11.2 billion in June. If we include purchases by foreign governments as well, the number jumps to $21.3 billion. Treasury securities remain a safe haven in a world of uncertainty.
When our government runs budget deficits over $1 trillion for three consecutive years (soon to be four and then five), it’s nice that foreigners around the world want to buy our exploding debt. If for some reason those same foreigners decided to stop buying our debt, we then have a major problem on our hands!
Evidently, our elected officials don’t believe that day will ever come. But it gets even worse. Heaven forbid if one day the foreigners decide to start unloading some of that debt! In that case, we will have a disaster on our hands!! Fortunately, we’re not there… yet.
Currently, the US national debt is $15.931 trillion. Of that total, the so-called “Debt Held by the Public,” is $11.13 trillion. Of that total, the debt held by foreigners is $5.406 trillion. So foreigners own a whopping 48.6% of all the debt held by the public!
Our government (both parties, by the way) loves it when foreigners buy our debt. Among other things, it helps keep our interest rates low. But this can be a double-edged sword, especially when foreigners own almost half of our bloated debt held by the public.
If we continue to spend out of control, there will come a day when the foreigners demand higher interest rates to finance our debt, and that day could be upon us. Yields on US Treasury debt have already stated to rise.
As noted above, the situation will become much worse when foreigners decide they no longer trust the “full faith and credit” of the US, and they not only stop buying US debt, they begin to unload it. Just think what interest rates could do in that environment.
This is why I have been on a mission lately to warn investors who are enamored with US Treasury bonds and bond mutual funds. This party won’t end pretty!
In case you’ve never been there, a great website for tracking our federal debt (and lots of other measures of debt) is: http://www.usdebtclock.org/. This is a very cool site, not only because of the reams of data, but also because it is all “interactive.” Check it out.
Here is a look at the largest foreign holders of our national debt:
As you can see, China and Japan are by far the largest holders of our debt. One country, China, doesn’t like us very much. The other, Japan, has been described as “a bug in search of a windshield.” Let’s hope they don’t need to call in our IOUs anytime soon!
The Political Landscape is Shifting
Since my political blog on Wednesday, more polls are drifting in the Romney/Ryan favor. Polls out in the last 48 hours have shown that Romney has pulled ahead of Obama in Florida, Virginia, Ohio and Wisconsin. Granted, these leads are all within the margin of error, but Romney has been behind in all of these states recently.
What is causing this? Part of it, of course, is the selection of Rep. Paul Ryan as Romney’s Veep. More Americans, especially younger people, are getting energized by the Ryan pick. A new Rasmussen poll out earlier this week found that Ryan’s “favorable” rating jumped to 50%, up from only 39% before Romney picked him for VP.
Second, I think the Obama campaign made a terrible mistake in jumping on Ryan for his proposed cuts to Medicare, when Obama himself made Medicare cuts of $716 billion to fund Obamacare. That one backfired big-time! Can you say, “rope-a-dope”?
But I think the biggest reason the president is falling behind in several key polls goes back to that huge gaffe he made in July in Roanoke, VA: “If you’ve got a business — you didn’t build that. Somebody else made that happen.” Those remarks, even when taken in context, cut to the bone for many hard-working Americans, especially small business owners. It appears that lots of people are coming to see the president for who he really is. Let’s hope so!
Have a great weekend everyone!
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