Chris Edwards, an economic analyst at the Cato Institute, said that as the U.S. owes a whopping $7 trillion to foreigners, the federal government would be forced to either hike taxes or cut spending immediately to be able to pay the increased interest.
The good news during the latest government showdown is that most of the federal debt is owned by U.S. shareholders.
The bad news is that still leaves roughly $7 trillion in federal debt abroad.
That includes $1.1 trillion held in Japan and $860 billion held in China. Those nations are the largest foreign sources of financing the U.S. debt.
That could give those holders an outsized say if President Biden and Congress do not strike an agreement to raise the government’s borrowing limit. Economists say holders of U.S. debt would then demand higher interest payments, adding to the nation’s already dire fiscal woes.
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“The federal government would be forced to either hike taxes or cut spending immediately to be able to pay in the increased interest,” said Chris Edwards, an economic analyst at the Cato Institute. “With Social Security and Medicare off the table, there is only so much the government could cut. It just depends on how much revenue there is at any moment.”
The Treasury Department said last week that it could run out of maneuvering room to keep paying the bills in early June, leaving the government bumping up against its borrowing limit.
If the result is a failure to make interest payments, then banks, investment funds and foreign governments could begin unloading U.S. debt.
Mr. Edwards told The Washington Times that such a situation could cause a global financial crisis.
“It would disrupt the international markets because we’re the largest economy in the world,” he said. “Confidence in the economy would be rocked, which would do damage all on its own apart from a debt default.”
The government’s total debt stands at $31.5 trillion.
Of that, $6.8 trillion is held by the government, most in the form of IOUs to the Social Security and Medicare trust funds.
According to data from the US Treasury, California owes the most debt at $18.6 billion and has defaulted on it.