Saving and Investment

A Warning On U.S. Debt

The U.S. is living beyond its means, according to the bond rating firm Fitch IBCA. Government data show the U.S. owed the rest of the world $1.3 trillion as of the end of 1997. While the country retained its AAA credit rating, Fitch warned that the economy as a whole is becoming too dependent on foreign capital, rather than domestic savings, to finance growth.

  • Trade deficits which have built up since the late 1980s appear likely to balloon as the Asian crisis slashes demand for U.S. exports.

  • As of May 31, Japan and the United Kingdom held by far the most U.S. Treasury securities -- Japan holding almost $267 billion and the U.K. holding nearly $266 billion, or somewhat over 21 percent each of the total debt outstanding held by foreigners.

  • Foreign investors held more than 37 percent of U.S. debt as of the end of May.

  • Other large holders of U.S. debt include Germany, OPEC, mainland China, Spain, Hong Kong, Singapore, the Netherlands Antilles and Taiwan.

Fitch officials said they were "not predicting any imminent disaster," but found the situation "worrying." Fitch said in its report that a drop in the value of the dollar and a decline in the U.S. stock market seem inevitable. The rating agency is the third largest -- behind Moody's Investors Service and Standard & Poor's.

John Lonski, of Moody's, says that a big sell-off of U.S. Treasury bonds by foreign holders is not a threat if U.S. investors are prepared to step in and buy. But if they're not, watch out, he warns.

Source: Rich Miller, "Rating Firm Gives Warning on Debt," USA Today, August 5, 1998.

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