Ask most folks who holds the lion’s share of America’s $16 trillion debt and they’ll tell you China.
But they would be wrong. The correct answer is Americans. Fully two-thirds of the national debt is owed to United States investors and future retirees, through the Social Security Trust Fund and pension plans for civil service workers and military personnel. China, it turns out, holds less than 8 percent of the money our government has borrowed over the years.
“It is true that China is the largest foreign owner of our debt,” said Josh Gordon, policy director of the Concord Coalition, a Virginia-based nonprofit that advocates getting the nation’s debt under control. “But the vast majority of our debt is held by us.”
Economists differ on when the National Debt actually crested the $16 trillion mark, with some saying it occurred on Friday and others saying it happens on Tuesday. But none doubt that the federal government's tab is immense and growing. Just under $5 trillion of the national debt is owed to the Social Security Trust Fund and federal pension systems. A little more than $11 trillion is owed to foreign and domestic investors and the Federal Reserve, which buys up treasuries in order to drag down interest rates through quantitative easing.
China has actually decreased its holdings of U.S. debt over the past year, dropping from $1.31 trillion in June 2011 to $1.16 trillion a year later, according to the Treasury Department. Japan holds nearly as much, at $1.12 trillion. Those countries are by far the biggest foreign holders, but dozens of other nations, including Brazil, Russia, Taiwan, Switzerland and the United Kingdom hold trillions more.
Inside the U.S., private investors hold nearly $1 trillion in federal debt, while mutual funds, insurance companies and state and local governments hold nearly double that amount.
Yet China continues to be viewed as the poster child for financing our deficit spending, often demonized as if it is holding our debt over us. Republican U.S. Rep. Michele Bachmann joked during her failed campaign for the GOP presidential nomination that when it came to the debt, "Hu's your daddy," a reference to Chinese President Hu Jintao.
President Obama, during his 2008 campaign, criticized President Bush for taking “out a credit card from the Bank of China in the name of our children, driving up our national debt from $5 trillion for the first 42 presidents … so that we now have over $9 trillion of debt that we are going to have to pay back.”
But Obama has been unable to slow the rapidly mounting debt. The nation owed $10.6 trillion on Jan. 20, 2009, when he was sworn in, and has added another $5.4 trillion since – more than Bush piled up in two terms.
"There's a lot of China-bashing," said Burton Abrams, an economics professor at University of Delaware and author of "Wreckonomics: America's 10 Worst Economic Policies of the Last 100 Years."
"You wouldn't get mad at a bank that gave you a low-interest loan to buy a home," he added. "But politicians like to find an external enemy to rally the troops against, and China's an easy target."
Gordon has a theory for why China gets blamed for doing little more than investing in the U.S. and allowing us to stave off the day of financial reckoning.
“If you look 10 or 15 years back, they probably weren’t in the top five,” Gordon said. “Then you had this very large country whose economy suddenly grew a pace not normally seen, and that came just as we were going into a cycle of massive deficit spending.
“Honestly, if it had been Great Britain, instead of a country with a record of human rights violations and one that has not been a traditional ally of ours, you might not have heard as much about it.”