Some people apparently believe it’s no big deal if Republicans block an increase in the federal debt ceiling and allow the government to default on its debt obligations. They owe themselves an ice-cold splash and another look.
Of the current $14.29 trillion in federal debt, $8.1 trillion is publicly held, and $6.2 trillion is held by the U.S. government. Of the publicly held debt, China, with $1.3 trillion, is the largest buyer of Treasury bonds. Other foreign countries combined hold $3.2 trillion, while a range of investors — individuals, pension funds, banks, state and local governments and other buyers hold $3.6 trillion.
Of the $6.2 trillion held by the government, $2.7 trillion is in Social Security trust funds. Other U.S. government agencies have $1.9 trillion, and the Federal Reserve systems has $1.6 trillion.
A default on dollar-denominated debt would rattle investor confidence in the dollar, reduce investments and the dollar’s value relative to other currencies, and drive up the cost of imports, especially oil, which accounts for half of the nation’s trade deficit.
China, as the largest holder of U.S. debt, would be constrained from dumping its Treasury notes because that would further diminish the value of its dollar accounts. However, other countries with substantial dollar investments — across Asia and Europe — might feel less constrained.