Question

Budgeting

What are some national security concerns about having half the federal debt held by the public is overseas?

Thanks.

Answer 1

Various countries outside US are interested in buying the government debt of US. They have their own economic and political reasons behind that. According to federal reserve, 40% of the US public debt is being owned by foreign investors. The main investors are China, Japan, UK etc. They hold US debt in billions with an aim to keep the prices of dollar strong. They want a cheaper exchange rate in terms of dollar for their exports that they sell to US. This will help them in growing and developing their economy overtime. However, giving public debt access to foreign countries beyond a point can be fatal. Some of the risks involved are as follows:

• In an event of war or if the two country's relations deteriorates, the holder may sell the debt in market, leading to higher interest rates and a weaker dollar.
• Weak currency, high inflation can destabilize the economy
• The country will have to find new buyers for their debt as immediate replacement, which is not possible.
• Economic Mayhem situation may occur and a country may well get into a recession

Therefore, the potential risk of letting public debt to be owned by foreign nations can turn out risky in the longer run.