I’ve heard this statement quite a bit over the years. I’m not sure where/why this originated since I don’t pay much attention to the news. It always amazes me how people can believe everything they hear/read.
So let’s look at the data and see how true this is.
The above chart shows the total dollar amount of US debt at the end of the 3rd quarter, $35.5 trillion.
Now about 20% (or $7.14 trillion) of that is actually held by US agency and trusts such as the Federal Reserve and Social Security. The chart above shows the total debt held by the public (total debt minus agency debt) is $28.3 trillion.
Before we go on, I just want to point out that anyone who owns bonds in their retirement accounts (which is most of us), is part of this total debt held by the public figure. I know this is probably obvious to most, but I just wanted to point it out anyways.
Foreign and international investors hold $8.7 trillion, or roughly 24% of the total US debt outstanding. This means 76% of US debt is held by domestic institutions and investors. So, the statement that another country owns us is already starting to fall flat. But let’s drill down a little deeper.
The chart below comes from the latest Treasury data showing that China currently owns about $772 billion in US debt, down from last year's $778 billion, and has actually been in decline for years. This means that China owns about 2.2% of the total US debt outstanding. The remaining foreign holders of treasuries are ones we have close diplomatic relations with.
If you hold 2% of a company’s shares outstanding, do you own that company and are any threat of a hostile takeover? Of course not. It’s pretty much the same thing here. The US runs a budget deficit with China, meaning we buy more stuff from them than they buy from us. So, China has a surplus of US dollars, which it reinvests back into US assets. No surprise that the decline of total trade with China corresponds with a decline in their amount of US debt holdings. It’s all correlated.
Now the other concern I’ve heard is that China will sell all of our debt at one time, which will crash the world and cause financial armageddon. SIFMA reports the average daily trading volume in the US treasury market is $879 billion. And that was a few years ago.
So the average daily trading volume of $879 billion is over $100 billion more than China’s total US debt holdings. I’m not saying it would be a non-event, should they ever consider dumping all treasuries at once. I’m sure there would be some temporary disruptions and rates would likely rise to absorb the incoming supply. But far from the doomsday scenarios you are probably hearing about.
And China dumping all debt would likely negatively impact their own economy, currency, and market more. The next question would be, what to do with all that money? There is still no better alternative than US assets at those dollar amounts. Which brings me to my next point.
I get the pessimism. Relative to the post-WWII history, the US is facing some challenges we haven’t experienced before. But relative to the rest of the world, the US still stands out and there isn’t a close second. The above chart compares US earnings to the rest of the world. Regular readers know I always say that stocks follow earnings and interest rates. So its no surprise US markets have outperformed the rest of the world by such a wide margin.
We have a few companies that surpassed the 3 trillion dollar market cap. The above chart shows one of those US companies (Nvidia (NASDAQ:NVDA)) is bigger than every other developed countries' entire market combined, besides Japan.
The US now makes up about 65% of the world's stock market, which is weighted by market capitalization. The next closest country is Japan at 5.5%. This is the biggest disparity between 1st and 2nd that I can even find when looking through history data.
To see how the global market capitalization has evolved over the years, the above chart shows the US has gone from 30% in the late 1980s to 64% today. While every other country's market cap weighting is in decline. No one else comes close to competing with the US dominance in global markets.
China might be closer on a full-cap basis, but over 55% of Chinese stocks aren’t investable, making China small by comparison. Plus their market has been in deep decline the last few years.
The US dollars use in global currency transactions ranges from 65% to as high as 90% depending on the data source. And the US dollars total percentage in global currency exchange holdings has declined a little over the years, but remains close to 60% with no close second.
The US has the best run companies in the world, best financial markets, most resilient economy, and the worlds reserve currency. But that doesn’t mean everything is roses either. There is a lot of attention on the total debt outstanding figures, but more importantly is the annual budget deficits, and most important is the cost to service that debt (interest payments). Both of which are moving sharply in the wrong direction.
The above chart shows we’ve run trillion dollar deficits for the past 5 years now. 2024’s budget deficit was $1.83 trillion, which has gotten worse for the last 2 years.
2024’s budget deficit as a percentage of GDP came in at 6.3%, which was one of the worst for a non-recessionary/war year.
Compounding the problem is the recent rise in interest rates. Which means the cost to finance these annual budget deficits have soared.
The US paid $882 billion in interest payments for 2024. Think of all the productive things that money could have went to.
Interest payments on outstanding debt reached 2.4% of GDP in 2024. We no longer have the benefit of low rates to smooth out the heavy spending. The US spent/borrowed heavily in response to the 2008 recession. However low rates kept financing costs manageable in comparison to GDP. But now it's gotten higher than at any point in the post-WWII history, besides the hyperinflation of the 1970’s when the CPI hit 15% and rates got as high as 20%.
It’s reached an unsustainable long-term path. But even then, if we look at the rest of the world, the US still stands out. The majority of the developed world is in worse shape, leaving no real alternative. While the situation needs improvement, the rumors of US demise are greatly exaggerated.