Do foreign holdings of U.S. government debt pose a threat to the economy?

There is an ongoing debate about whether foreign holdings of U.S. government debt pose a threat to the economy, but there is a complete absence of hard evidence or solid reasoning to suggest that there is any threat at all. Sure, you can concoct artificial scenarios where there might be a threat, but we should focus on realistic and likely scenarios.

Interest rates, foreign exchange rates, foreign trade, levels of government debt, government budgets and budget gaps, and central bank reserve decisions will fluctuate and be all over the map in the coming years and decades. That is normal and an indication of a healthy global financial system.

The only true "threats" that would occur on any of these fronts would arise from either a deep and prolonged recession or a protracted bout of runaway inflation, neither of which is in the cards.

Much of the "threat" worry was concocted by speculators and Wall Street "analysts" who have sought to increase volatility in the financial system to boost their own profits. This is known as "talking your book", and it is not reasonable and not something that sane investors should tolerate or encourage or participate in.

This trumped-up "issue" has taken on a political dimension, rendering the debate even more irrational than it already was.

So, the level of threat posed to the economy by foreign holdings of U.S. government debt is simply: virtually nonexistent.

-- Jack Krupansky