How does America owe itself money
Who lends the US the most money
The US has the largest national debt in the world. China, Japan, but also Switzerland lend money to the Americans.
The other countries hold US government bonds worth a measly $ 6,600 billion. America is the largest debtor in the world. But to whom does the US owe money? And why are American bonds essential for the functioning of the world economy? The most important answers at a glance.
Who does the American state owe money to?
At the end of 2018, the US national debt was around $ 22,000 billion. Most of the debt, however, is held by Americans themselves - such as states and municipalities, the central bank, pension funds, and other institutional and private investors.
The US debt is increasing sharply
Yet foreign states hold trillions in US bonds. There has recently been a shift here. Japan has replaced China as the largest creditor in the United States. In June, Japan owned $ 1,122 billion in US Treasuries, according to Treasury Department data released Thursday evening. The paper held by China was valued at $ 1,112 billion.
Why are China and Japan so far ahead?
The high foreign currency reserves are probably a long-term consequence of the Asian crisis in the 1990s. The fear of an economic crisis triggered by a rapid withdrawal of capital is still deep in the bones of almost all countries in the Far East. Since then, the Asians have massively expanded their foreign currency reserves through high trade surpluses. Most of the reserves are held by the countries in dollars. In order not to just leave the dollars lying around, invest them in risk-free government bonds.
Japan outstrips China
Why did Japan overtake China?
For a long time, China invested a large part of its surpluses in American government bonds. This approach by the Chinese central bank was highly controversial. However, after the Beijing monetary authorities abandoned their line in 2013 and announced that it would no longer be of use to China to amass foreign currency reserves, the currency was released and the large surpluses were reduced a little.
With this change in policy, Japan caught up and overtook the Chinese. Nevertheless, the still high trade surpluses remain the main reason for China's large reserves.
And what does that have to do with the trade war?
Because of the trade conflict with the United States, there was repeated speculation that the leadership in Beijing might throw some of the US Treasury bonds on the market and thus put the United States under pressure. That could drive US interest rates up and make debt more expensive for the US government. However, this would also damage itself to China, as the value of the papers remaining in the portfolio would decrease considerably.
Why does Switzerland hold such high reserves?
Switzerland is actually not a “classic” country with high reserves. The Swiss Confederation traditionally has rather large cash reserves (although the gold backing of the Swiss franc is anchored in the constitution). However, the high foreign currency holdings of the Swiss National Bank are a development of recent years. The Swiss central bank is forced to react by the extremely expansionary policy of the ECB. It does this by buying foreign currencies on a large scale in addition to using negative interest rates. Although this development eased somewhat after the Swiss franc was released, it could continue for a few more years. The ECB has decided to continue its ultra-loose monetary policy. The long overdue normalization of its crisis policy, which has lasted for almost ten years, will be postponed further into the future.
Why does the US have so much debt?
The US has the largest trade deficit in the world. Washington can afford this thanks to the dollar. The American currency has a special position. Former Secretary of the Economy, John Connally, put this in a nutshell: "The dollar is our currency, but your problem." The famous words allude to the fact that the dollar is the world currency. The US Federal Reserve can print new money almost without limit without depriving the economy of foreign currencies as the “world currency”.
Why do oil countries have higher reserves?
Traditionally, oil countries top the US bond statistics alongside Asians. This is due to the fact that the raw material countries have a high inflow of foreign currency thanks to the black gold. It is important for these states not to squander the profits they have received from the gift of oil.
Foreign currency reserves are essential, especially in times of low raw material prices. Otherwise these countries could suffer the fate of Venezuela. But saving in good years is not enough. The economy must be prepared for the time after the oil rubbish. Otherwise a rude awakening threatens even with large reserves.
How can investors benefit from this knowledge?
Foreign currency reserves are the most important means for a central bank to take action against a currency collapse or a large capital withdrawal. The larger this buffer, the better a country is immune to external shocks (such as a collapse in oil prices or an interest rate hike in the USA). If a buffer is too small, this can be an opportunity for investors. George Soros has proven that this works in the past with his legendary bet against the Bank of England - when the British central bank ran out of reserves because it wanted to use it to support the exchange rate of the pound.
For investors, however, the following applies: Even large foreign currency reserves are not everything. Investing in equities from emerging countries in particular harbors great risks. The firms are little known and not so many foreign analysts cover them. Nevertheless, it cannot be denied that big risks also entice big profits.
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