Financing U.S. Debt: Is There Enough Money in the World – and At What Cost?

I’ve isolated the money quote from the research. The research suggests that in order to finance our debt, by 2020 foreigners will have to allocate 19% of their GDP to finance the debt of the United States. Any emphasis is mine.

Robert M. La Follette School of Public Affairs at the University of Wisconsin-Madison

Working Paper Series
La Follette School Working Paper No. 2010-015
http://www.lafollette.wisc.edu/publications/workingpapers

5.4.3. Is there enough money in the world … in the “global portfolio?” A third challenge is whether the increase in foreign holdings of such magnitude as in the base case is plausible or even possible. That is, reflecting the Meltzer quote earlier in the paper: “Is there enough money in the world?” Chart 11 shows the implied effect from the base case on foreign official holdings of U.S. Treasury securities as a percent of world GDP (in U.S. dollars). The large increase in foreign official holdings implied by the base case would require those holdings to rise to about 19 percent of rest-of-world (ROW) GDP, up from less than 5 percent for most years of history. Bertaut, Kamin and Thomas (2009) and Mann (2009) examine the issue of the U.S. asset share of the total world asset portfolio and the extent to which foreign investment in U.S. assets can increase under continued U.S. current account deficits and growth in the U.S. net international debt. Mann observed a “financial leverage” for the “global investor portfolio” of 1.6 times (160 percent) ROW GDP. The implied change in foreign official holdings from about 7 percent of world GDP in 2009 to more than 18 percent of ROW GDP by 2020 could at first glance therefore represent a potentially manageable shift compared to the total (non-U.S.) world portfolio. Mann showed that the share of U.S. assets held by foreigners in the world portfolio was about 14 percent in 2006, and that even with a doubling or tripling of that share (associated with projected U.S. current account imbalances), “these percentages would appear to imply US assets in the global investor’s portfolio about equal to the market cap weights.” Although questions would remain about the implementation and allocations associated with increased foreign official holdings – including issues associated with private versus official portfolio allocations and competition for funds amongst various international borrowers in a time of higher debt – the relationships suggest at face value that “there would be enough money in the world” to meet the financing requirements for U.S. Treasuries over the intermediate horizon (through 2020) and under the assumptions considered in this analysis. Uncertainty remains, however, under such a projection whether world portfolio allocations would, in fact, adjust sufficiently to accommodate higher shares of U.S. assets. Further, such an expansion has limits that ultimately could not be sustained indefinitely over the long run and beyond the intermediate horizon considered here. 35 34 Auerbach and Gale (2009) discuss concerns about negative effects on GDP growth and lower potential output. 35 Similarly, Mann concluded that, in contrast to the implications from the average portfolio percentages, it “looks unreasonable” for the required marginal contributions per dollar of new investment that would have to occur for holdings of U.S. assets under those increased world portfolio shares.

Read the research here.