J. Scott Applewhite  /  AP file
Prime Minister Koizumi, seen here at a 2003 meeting with President Bush, roiled financial markets on March 10 by suggesting Japan would diversify out of U.S. Treasury bonds.
By Tom Curry National affairs writer
updated 3/28/2005 7:58:08 AM ET 2005-03-28T12:58:08

Democratic candidates have begun to test market a new theme: America is losing control of its economic destiny due to excessive government borrowing from foreigners.

“The shocking thing is that of the debt we went out and borrowed last year, almost all of it was borrowed from foreign sources,” said Sen. Bill Nelson, D-Fla., at a recent Senate Budget Committee hearing. “And the two biggest sources that we're borrowing from are banks in Japan and China. This is just simply not a good position for us, from a defense posture, to be in.”

Nelson is running for re-election next year.

“Foreign governments and individuals are footing the bill for our wasteful spending, and the more of our debt they own, the less control we have,” Sen. Evan Bayh, D- Indiana, a likely 2008 presidential contender, said two weeks ago.

Pennsylvania Democratic Senate candidate Bob Casey, Jr. warned that President Bush’s call for private accounts within Social Security “will result in $2 trillion being borrowed from foreign governments.”

Senate Democratic whip Dick Durbin of Illinois sounded the same theme in a speech attacking Bush’s Social Security overhaul. “Who is paying for the debt of America today? The No. 1 country in the world is Japan,” Durbin told the Senate last month. “Not far down the list we will find China and Korea."

Durbin said "these countries, the mortgage holders of America" were "exporting more goods to America at the same time as they own our debt ... As we lose millions of manufacturing jobs across America, we lose them to countries that are holding and owning America's debt: China, Japan, Korea.”

Increased foreign holdings
Foreign holders account for a bit more than 50 percent of the U.S. Treasury securities held by the public, up from 36 percent in 2000, and 19 percent in 1992, according to Catherine Mann, a Senior Fellow at the Institute for International Economics in Washington.

Even a hint that foreign central banks have decided to diversify out of Treasury bonds can cause the dollar’s value to tumble and push Treasury yields up.

Two weeks ago, Japanese Prime Minister Junichiro Koizumi triggered a one-day fright in financial markets when he said, in reference to Japan’s foreign reserves, “I believe diversification is necessary.”

To calm the turmoil, Japan’s finance ministry issued a statement saying Koizumi did not advocate diversifying out of dollars.

Major Market Indices

Indebtedness to foreigners has consequences for Americans from Omaha to Orlando who are trying to get a home mortgage or who have adjustable-rate mortgages. If foreigners diversify out of U.S. Treasury securities, mortgage rates rise.

“Voters are appalled to hear the amount of debt that is held by foreign countries,” Democratic pollster Celinda Lake said.

Democratic candidates in 2006 will link voters’ concern about Social Security to the debt “because much of the borrowing that jeopardizes Social Security is also from foreign countries,” said Lake.

“Eighty percent of the federal budget deficit is being financed by foreign investors,” said Christian Weller, senior economist at the Center for American Progress, a Democratic-affiliated think tank in Washington.

Beholden to a few
“It’s a diversification problem: we are dependent on a very small number of buyers” of Treasury bonds, said Weller. “It’s dangerous to be beholden to those few lenders, regardless of who they are.”

One difficulty for the Democrats in trying to exploit this issue is that neither party in Congress musters a majority to cut the spending that makes borrowing necessary. Voters can see evidence that neither party has credibility as fiscal conservatives.

Before the Senate left on its Easter break, deficit reduction advocates suffered a telling defeat as 45 Democratic senators, joined by seven Republicans, voted to restore $12 billion in proposed cuts in Medicaid outlays over the next five years.

The majority of Republicans jettisoned fiscal conservatism in 2003 when 44 GOP senators, along with ten Democrats, voted for a new prescription drug entitlement as part of Medicare. This will cost taxpayers nearly $600 billion just in its first ten years of operation, according to the Congressional Budget Office.

GOP pollster sees 'probing'
Republican pollster Ed Goeas said he considered Democrats’ rhetoric about foreigners holding Treasury bonds “more of a probing than a specific pathway” to Democratic victory.

Goeas said the findings in the new Battleground Poll which he and Lake released Thursday “have to be extremely discouraging for the Democrats.”

The March 7-9 Battleground Poll of 1,000 registered voters found that 53 percent of those interviewed approved of the job Bush is doing as president, even while 53 percent opposed Bush’s idea for personal retirement accounts.

“Here the Democrats think they have been beating up the president on the Social Security issue and he hasn’t lost any ground,” Goeas said. “There’s no indication that he is in worse shape today than he was on Election Day, in fact indications are that he is slightly better shape. I think Democrats will continue to probe for ‘how do we get at this guy?’”

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