Why "Who Owns the US?" is a Trick Question

♠ Posted by Emmanuel in , at 3/08/2011 12:03:00 AM
OK, so I may have been (partly) at fault on this one. A few years ago, I ran a feature on "Don't Offend the Chinese, the Real Owners of America." The basic premise of that article went like this: America is broke while China is rich. Although this fact is self-evident, most of the support China lent to the US was in the form of Treasuries. Given Treasuries' measly returns, it wouldn't be too long before the Chinese snapped up prime American companies. To be sure, this occurrence has yet to pan out since the so-called enterprising Americans keep citing specious "security" concerns in limiting Chinese purchases of US firms. Still, it probably won't be long before foreigners tire of buying low-yielding American sovereign debt given that appetite isn't infinite as some would suggest. But don't take my word for it; ask Barry Eichengreen.

In accounting terms, assets are equivalent to liabilities plus owners' equity. This is one of the first things a business major learns. National accounting is not quite identical but is similar in one very important respect: holding another's debt is not the same thing as ownership. You don't receive voting rights or ownership stakes by holding debt but by owning equity (shares of stock). Additionally, US Treasuries are akin to corporate debentures in being unsecured. Investopedia has a neat explanation:
[Debentures are] a type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture.

Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the repayment. An example of a government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill (T-bill). T-bonds and T-bills are generally considered risk free because governments, at worst, can print off more money or raise taxes to pay these type of debts.
So that's straightforward as far as the US goes. Another type of liability is called secured debt which entitles lenders to specific assets in the event of default. A simple example would be a home mortgage. Back to Investopedia:
[Secured debt is] backed or secured by collateral to reduce the risk associated with lending. An example would be a mortgage, your house is considered collateral towards the debt. If you default on repayment, the bank seizes your house, sells it and uses the proceeds to pay back the debt.

Assets backing debt or a debt instrument are considered security, which means they can be claimed by the lender if default occurs.
Insofar as Treasuries are alike debentures, their holders cannot claim specific government-owned assets in the case of American default in this instance. So, I roll my eyes when I read headlines like this one by Main Street that appeared in Yahoo! on "Who Owns the U.S?" Armed with the knowledge above, spot the elementary howler:
While most of the country's $14 trillion debt is held by private banks in the U.S., the Treasury Department and the Federal Reserve Board estimate that, as of December, about $4.4 trillion of it was held by foreign governments that purchase our treasury securities much as an investor buys shares in a company and comes to own his or her little chunk of the organization.

Looking at the list of our top international creditors, a few overall characteristics show some interesting trends: Three of the top 10 spots are held by China and its constituent parts, and while two of our biggest creditors are fellow English-speaking democracies, a considerable share of our debt is held by oil exporters that tend to be decidedly less friendly in other areas of international relations.
Wrong, wrong, wrong. I would flunk the writer straight out of Accounting 101. For the same reason that bondholders aren't shareholders, foreigners owning Treasuries have no ownership stakes in America, period. This article was meant to be a comment on US financial illiteracy as illustrated by America's towering debts, but the honest truth is that it reflects the writer's own financial illiteracy. You should see the comments on the article that are even more astoundingly ill-informed. I honestly despair for the US when this sort of thing is shared 23,000 times on Facebook and is retweeted 613 times.

Are people really this gullible? Maybe social media really is making us dumber. Some fools fool themselves I guess, but they're not fooling me.