How do foreigners 'finance' U.S. debt?

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Q: What exactly does it mean to the layperson when experts say foreigners are "financing our deficits." — Michael C., Raytown, Mo.

A: If you haven't heard this before, we suggest you avoid reading it near mealtime. Here goes:

Unlike you and me (and most state governments), the United States Congress can spend as much as it likes (as long as the president signs the bills) without raising the taxes it needs to pay for it. The difference — the money our government spends every day that is not covered by taxes — is called the "federal budget deficit."

For the fiscal year 2004 that just ended (the federal government keeps the books based on a year that starts in October), the U.S. government spent $2.3 trillion and collected $1.9 trillion in taxes and fees. The difference — the deficit — came to $412 billion. That's up from $377 billion the year before. By the way, your share, based on the 131 million tax returns filed, came to about $3,150 last year.

To balance the books (the rules at least require that Congress keep track of our money), the U.S. Treasury prints up new bonds, notes and bills and auctions them off every three months to investors willing to lend their savings to Uncle Sam.

Though most Treasury debt is held by U.S. banks, institutional and individual investors, The biggest chunk of cash from overseas, as of Sept. 2004, came from Japan -- something like $720 billion, or about 40 percent of the debt held outside the U.S. The next biggest lenders are China ($174.4 billion), Great Britain ($134.6 billion) and "Caribbean Banking Centers" ($100.3 billion) — which roughly translates as "people who don't want you to know who they are."

So who, exactly, is so generously helping Uncle Sam make ends meet? The list includes banks, governments, individual investors, and institutional investors like pension funds and life insurance companies. By lending their money to the U.S. government, they are financing our deficits just as surely as General Motors finances the purchase of a new car or a mortgage lender finances the purchase of a new home or a credit card lender finances your holiday shopping.

But unlike a car- or home-buyer or credit card shopper, the U.S. government doesn't have to pay down these loans. When it comes time to pay a foreign investor back — when a U.S. Treasury bond "matures" — the government just "rolls over" the loan by auctioning off more paper to another lender, using that money to pay back the loan that just matured.

As a result, this pile of debt (also known as the "national debt") just keeps getting bigger and bigger — just as your credit card balance does when you pay only the monthly minimum. But the U.S. government carries a much bigger balance. As of Nov. 19, 2004, the amount totaled $7,497,665,301,236.87 ($7.5 trillion). Your share: about $57,000.

Foreigners who lend us their money get paid interest, of course. (Otherwise, why would they give us the money?) Last year, the interest charges on the national debt came to $321,566,000,000 ($321.6 billion), or about $26.8 billion a month. Think of it as the monthly minimum on Uncle Sam's credit card.

And that's where the paper chase stops. Those overseas debt holders want real money — yours and mine — for those interest payments. Last year, interest on the national debt ate up  more cash than the U.S. spent on the Departments of Agriculture ($71.7 billion); Education ($62.8 billion); Veterans Affairs ($59.6 billion); Transportation ($54.5 billion); Homeland Security ($26.7 billion); Energy ($20.0 million) or the Environmental Protection Agency ($8.3 billion) to name a few. Only Health and Human Services ($543.2 billion); Social Security ($530.2 billion) and Defense ($437.1 billion) get more. (For a breakdown of where your money went, see Page 5 of the for last year's spending.)

If it was you or me the bank would have taken our credit cards away a long time ago. But the government doesn't work that way. Every time Congress wants to spend more money, it just raises its own credit limit. And, unlike the credit cards available to you and me, the U.S. government doesn't get charged late fees or see its interest rate raised with no explanation from the lender.

For everyone else, there's Mastercard.