The REAL Reason Japan And China Own So Much US Debt

There are few subjects that inspire more confusion in economics than Asian ownership of US debt.

Politicians like to use Chinese ownership of Treasuries to scaremonger on the deficit, on the premise that the Chinese will own us in the future.

In a new post at the new business site Quartz, Matt Phillips poses a counterintuitive argument: China vs. Japan: The Winner? The US.

The premise? China and Japan are buying more and more debt to weaken their own currencies, and that allows the US to borrow more cheaply.

Phillips makes this pretty chart.



Here are the problems with this...

First, it's not a China vs. Japan thing.

Also, ownership of US debt is not a currency move, it's a function of trade flows. China's trade deficit has been shrinking, ergo it has fewer dollars to recycle into Treasuries, hence the decline of the pink line.

Furthermore, the decline in US rates has nothing to do with Japanese and Chinese UST holdings. Instead, it's about a general decline in long-term growth and inflation expectations, the same factors that always determine interest rates.

Bottom line: China and Japan own US debt because they sell a lot of stuff to the US and those dollars get put back into Treasuries. That's it.