Foreign individuals, banks and governments have always held a part of the U.S. national debt, but until very recently it was less than 20% of the total. That, plus much lower totals overall, made the debt a simpler problem. After all, we owed most of the money to ourselves, or at least to American banks, pension plans and the like.
Now more than half of the nation's debt is held by foreigners. The figure started to rise in the Clinton years, hitting 35% at the end of his second term. It zoomed when George W. Bush took office. Now it's about 52%, according to Treasury Department figures.
Here are some of the bigger chunks: We owe Japanese interests $682.8 billion. China's in for $249.8 billion, and our friends in the OPEC countries hold $67.8 billion.
Those are debts. So what happens when those countries lose confidence in us, say, over out-of-control federal budgets, and call in their notes? What does that do to the U.S. economy?
When the IOUs start to hit...
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We stop giving every Tom, Dick and Harry foreign aid and pay our own bills first .
Dave, the US contributes only 0.17% of its GNP as foreign aid. (cite). Cutting it to zero wouldn't balance our budget-- it wouldn't even make a dent.
China's Reserve (from Brad DeLong's website), How does the Fed imagine the US current account deficit will adjust? from Brad Setser's website, and Economic Armageddon (Tyler Cowen's contribution). There's lots of variation in the predictions.