Does America Borrow Money from Other Countries?

Yes, the United States borrows a substantial amount of money from foreign nations, and this fact is not only important but crucial to understanding the dynamics of the global economy. Most people are aware that the U.S. has one of the largest economies in the world, but what may come as a surprise is that America is also one of the biggest borrowers globally. It isn't just about foreign aid or financial assistance; we're talking about trillions of dollars lent to the U.S. government by countries such as China, Japan, and many others.

Why does America, a country with a GDP surpassing $26 trillion, need to borrow money from other countries? To break it down simply: the U.S. government operates with a budget deficit, meaning it spends more than it earns through taxes and other forms of revenue. This deficit is often financed by issuing Treasury securities, essentially IOUs that are bought by both domestic and foreign investors.

Foreign governments are major buyers of these securities because U.S. debt is considered one of the safest investments globally. Countries like China and Japan, which hold more than a trillion dollars in U.S. debt each, buy these Treasury bonds as a way to safely store their surplus foreign exchange reserves while earning a modest return on their investment. Other countries, including the UK, Brazil, and several oil-exporting nations, also hold significant amounts of U.S. debt.

The paradox of borrowing: Why would a powerful economy rely so heavily on foreign capital? It turns out, borrowing money from other countries allows the U.S. to maintain lower interest rates domestically. The U.S. government borrows at relatively low interest rates because of its strong credit rating and the global demand for safe, liquid investments. This influx of foreign money helps fund federal programs, infrastructure projects, and military spending. At the same time, it keeps borrowing costs down for U.S. consumers and businesses. But it also creates a delicate balance between being the world’s most reliable debtor and maintaining long-term economic sustainability.

To fully grasp how deep this reliance goes, let’s dive into the specifics:

How Does the U.S. Borrow from Other Countries?

The primary method the U.S. uses to borrow from other countries is by selling Treasury bonds, notes, and bills. These are forms of government debt that come with a promise to repay with interest. The way it works is simple: countries or investors purchase these bonds and, in return, the U.S. agrees to pay back the borrowed amount after a set period, along with interest. Bonds with different maturities—ranging from a few months to decades—allow flexibility in the repayment schedule.

Foreign entities hold these securities as part of their foreign exchange reserves. The U.S. dollar, as the world’s primary reserve currency, is extremely attractive to foreign governments. They trust the U.S. government’s ability to repay its debt, and in return, the U.S. benefits from a low-cost source of financing.

Let’s not forget that it's not just governments buying U.S. debt. International investors, financial institutions, and even individuals buy up Treasury bonds, driven by the promise of security and stability.

Major Foreign Holders of U.S. Debt

One of the most frequently asked questions is: Who exactly lends money to the U.S.? The answer is largely foreign governments and their central banks. As of 2023, the largest foreign holders of U.S. debt include:

1. China: China is the second-largest holder of U.S. debt, with a total holding that fluctuates between $1.1 trillion and $1.3 trillion. China buys U.S. debt to keep its own currency, the yuan, stable against the U.S. dollar, which is crucial for its export-driven economy. A stable currency exchange rate ensures that Chinese products remain competitively priced in the global market.

2. Japan: Japan holds an even larger portion of U.S. debt than China, with over $1.2 trillion in U.S. Treasury securities. Like China, Japan's economy benefits from keeping its currency, the yen, weaker relative to the dollar. Buying U.S. debt helps them achieve this while also providing a safe investment.

3. Other Countries: The U.K., Brazil, Switzerland, and several oil-rich nations in the Middle East are also significant holders of U.S. debt. These countries accumulate large foreign exchange reserves through exports and often invest a substantial portion of these reserves in U.S. government securities.

Here’s an important note: Just because these countries hold a lot of U.S. debt doesn’t mean America is “beholden” to them. U.S. Treasuries are considered some of the safest investments in the world, which is why so many countries are willing to lend money to the U.S. It's a mutually beneficial relationship: foreign countries get a safe, reliable investment, and the U.S. gets access to capital to finance its deficit at low interest rates.

Why Does the U.S. Borrow so Much?

Now, here’s the million-dollar (or should we say trillion-dollar) question: Why does the U.S., with its enormous economy, need to borrow so much from other countries?

The short answer: Because of the federal deficit.

Each year, the U.S. government spends more than it collects in taxes. The difference—known as the budget deficit—is made up by borrowing. In 2022, the federal deficit stood at around $1.4 trillion, following the massive expenditures during the COVID-19 pandemic. Even in more "normal" years, deficits typically hover between $500 billion and $1 trillion. This constant need to cover deficits by borrowing is why the U.S. national debt has ballooned to over $31 trillion.

The U.S. national debt is made up of two parts:

1. Public Debt: This is the debt held by external investors, which includes foreign governments, as well as domestic investors.
2. Intragovernmental Holdings: This portion of the debt is held by various U.S. government trust funds, such as Social Security.

Foreign holders of U.S. debt make up a significant chunk of the public debt—roughly one-third. But here’s where it gets interesting: despite borrowing so much from foreign countries, the U.S. still benefits from being the world’s primary reserve currency. This means there is always a high demand for U.S. dollars and dollar-denominated assets, like Treasury bonds, which helps keep interest rates low and maintains global trust in the U.S. economy.

The Risks of Borrowing from Other Countries

While borrowing money allows the U.S. to maintain lower interest rates and fund its federal spending, there are risks associated with being so dependent on foreign lenders.

One potential risk is geopolitical leverage. If a major creditor country, like China, decided to dump its holdings of U.S. Treasury bonds, it could potentially drive up U.S. interest rates and disrupt global markets. However, such a move would also hurt the creditor country, as it would lead to a devaluation of their remaining U.S. debt holdings and potentially destabilize their own economy. This creates a situation where both sides are interdependent, making such actions unlikely under normal circumstances.

Another risk is that continued borrowing could lead to unsustainable debt levels. While the U.S. currently benefits from low interest rates, rising interest rates could make it more expensive for the U.S. government to service its debt. This could lead to higher taxes or cuts in government programs, both of which would have significant economic and political consequences.

Lastly, currency devaluation is a potential risk. If the U.S. borrows too much and its debt levels become unsustainable, it could lead to a loss of confidence in the U.S. dollar, causing its value to decrease relative to other currencies. A weaker dollar would make imports more expensive and could lead to inflationary pressures within the U.S. economy.

Conclusion

The U.S. borrows extensively from other countries, primarily through the sale of Treasury bonds, which are viewed as safe investments by foreign governments and investors. While this borrowing allows the U.S. to finance its deficit and keep interest rates low, it also comes with risks, including potential geopolitical leverage by foreign creditors and the possibility of unsustainable debt levels. However, the symbiotic relationship between the U.S. and its foreign lenders means that, for now, this system continues to function smoothly, benefiting both sides.

In a world of interconnected economies, borrowing is not just a financial tool but a strategic one. And as long as the U.S. dollar remains the world’s primary reserve currency, America’s ability to borrow from other countries will likely remain a key feature of the global financial landscape.