The Role of China in the U.S. Debt Crisis

In 2001, the U.S. gross public debt was about $6 trillion; a decade later it was $14 trillion; by the end of 2012 it exceeded $16 trillion. A large part of that increase was absorbed by foreign holders, especially central banks in China and Japan. With the U.S. government gross debt ratio now in excess of 100 percent of GDP, not including the trillions of dollars of unfunded liabilities in Social Security and Medicare, it is time to stop blaming China for the U.S. debt crisis.China is the largest foreign holder of Treasury debt, with a portfolio estimated at $1.2 trillion or 8.4 percent of the U.S. gross public debt of $14.3 trillion at year-end 2011 (Table 1). Total foreign ownership accounts for $4.5 trillion, while the bulk of the debt is held by U.S. government trust funds, the central bank, and domestic investors. The Social Security Trust Fund and the Federal Reserve now hold nearly $6 trillion of U.S. public debt. Of course, no matter who holds the public debt, U.S. taxpayers eventually have to fund it.The cause of the U.S. debt crisis is overspending and an explosion in entitlements, especially Medicare and Medicaid. The stimulus programs in response to the 2008–09 financial crisis have also contributed to U.S. public debt. The Federal Reserve has vastly expanded its balance sheet and in fiscal year 2011 was the largest buyer of new U.S. Treasury debt, acquiring 77 percent (Gramm and Taylor 2012)