Evidence of China's slowdown is appearing in unexpected places.
I recall a long-ago discussion with an older man who grew up in Germany during the nation’s postwar reconstruction. He recalled fond feelings among his generation for the United States: “Everything good was made in America! The music, the cars, the movies, the moon landing!” While our nation faces more competition for our tangible and cultural exports, one export has remained in high demand: U.S. Treasury instruments.
Each month, the U.S. Treasury updates its International Capital (TIC) reports of cross-border financial flows, including a report of foreign holdings of U.S. debt. Through June, TIC shows an overall steady demand for sovereign debt, but with a shifting composition.
The role of foreign holdings can be a subject of hyperbole, suggesting that the U.S. has compromised its autonomy by being in debt to other nations. That is an overstatement and an oversimplification. Nations hold foreign-denominated assets as buffers against currency fluctuations and to support international trade. The U.S runs a trade deficit; dollars are exported in exchange for imported goods. The nation’s debt instruments are the standard for risk-free assets, and the U.S. dollar is the world’s reserve currency, creating more incentive to amass dollar assets. And the TIC summaries list only the location of the holder of the debt. Asset owners are split roughly 50-50 between official and private sector investments. The potential that these holdings might be used for political purposes is very low.
The tactical purpose of foreign holdings explains why they have held fairly steady through an interval of active fiscal policy. COVID interventions ballooned total U.S. publicly-held debt by nearly 50%, from $17.2 trillion in January 2020 to $25.5 trillion in June of this year. Over that same interval, total foreign holdings did not increase proportionately, growing by only $536 billion (+7.6%). This new tranche of debt was largely absorbed by the Federal Reserve and other domestic buyers.