Sometimes, the ever-increasing total of international debt and the potential economic insecurity it could unleash is daunting thanks to over $250 trillion owed around the world in 2019. Leading the pack in foreign debt examples is the United States, owing more internationally than any other country and amounting to $67,000 of debt for every American citizen. Policy makers and economists bicker about whether types of external debt matter. Does it, and why does the U.S. owe so much internationally?
TL;DR (Too Long; Didn't Read)
For stimulus reasons, governments borrow money from other nations. It's often a complex house of cards where economies rely on each other, but borrowing can have many positive effects on economic growth.
International Borrowing Definition
The amount of national debt, or the deficit, in the U.S. is over $23 trillion, up by over 15% in under three years and is expected to grow by another $6 trillion by 2029 — and that’s just “on the books” debt. Of that, about 30% — nearly $7 trillion — is owed to foreign governments and is money the U.S. borrowed as operating costs, essentially. Over a third of that debt is owed to China and Japan.
Why would foreign governments loan money to the U.S., though? In the case of China and Japan, loaning money to the U.S. to help the government accomplish its tasks and keep the American economy strong keeps the American dollar strong. This sounds counterintuitive, but a higher U.S. dollar means merchants, manufacturers and citizens in the U.S. have buying power, which is good for Chinese and Japanese export business. Hence, helping the U.S. economy stay strong is good for their economies.
Debt Is Bad, Right?
Look at Europe’s governments aiming to reduce debt — like Greece — and see how they're doing. Unemployment is often in the double digits, and businesses often close. Like all credit, there’s good and bad behind what debt does for a nation.
Hence, there are divided opinions on America’s debt, but they all agree that it's good that America's debt is in its own currency. If that $1 trillion plus owed to China was issued on the yuan, a rising yuan would significantly increase the U.S. debt, but being U.S. dollar debt means the only thing affecting international debt is the interest accumulating.
How Debt Impacts Small Businesses
International debt doesn’t really affect small businesses, just like the national deficit doesn’t — in theory. Much of the debt comes from money owed to Americans through Social Security, armed forces payroll and so on. However, there are other prior financial commitments not yet due that economists say could triple the deficit to $70 trillion.
The interesting number in 2019 is the $3 trillion racked up in the past three years because that recent debt increase is from revenue shortfalls after reducing domestic tax rates. The Federal Reserve Chair Powell cautioned that if debt continues to outpace the economy, it will be a problem. If so, the quick solution by the U.S. government would be raising domestic taxes, which would impact all businesses through taxes owed and also through tighter public spending, and incomes may decline under higher taxes.
For small businesses depending on imports from China or Japan, the U.S. debt owed to the Asian nations is advantageous because in a way, holding so much American debt creates a mutually beneficial relationship — but it’s also an insurance policy. If either were to call in their American debts, the American dollar's value would plunge but so would the debt value owed to the two economic powerhouses. Even if China or Japan merely sold their U.S. Treasury holdings to raise capital, it would hurt the American dollar so much that any capital raised would be at a loss. China in particular is happy to maintain the status quo, as it has made its economy the world's strongest thanks to Chinese currency management making its products so attractive to U.S. consumers.
- U.S. Department of the Treasury: Major Foreign Holders of Treasury Securities
- CNBC: Global Debt Surged to a Record $250 Trillion in the First Half of 2019, Led by the US and China
- Forbes: Everything You've Been Told About Government Debt Is Wrong
- Global Finance: Countries With The Most External Debt 2019
Steffani Cameron is a professional writer who has written for the Washington Post, Culture, Yahoo!, Canadian Traveller, and many other platforms. Some writing projects have included ghost-writing for CEOs and doing strategy white papers. She frequently writes for corporate clients representing Fortune 500 brands on subjects that include marketing, business, and social media trends.