At over $34 trillion, the U.S. national debt is a figure so large it can be difficult to grasp. Yet, when broken down, it reveals not only the financial obligations of the United States but also the complex web of stakeholders—domestic and foreign—who hold the nation’s IOUs.
While much of the debate around national debt tends to focus on how it grows, what often goes overlooked is the whobehind the numbers: Who is actually on the other side of the ledger? And how do these creditors influence the economy and policy decisions?
The Two Major Categories of U.S. Debt
The national debt is primarily divided into two categories: debt held by the public and intragovernmental holdings. Understanding the difference is key to understanding the broader dynamics of U.S. debt.
1. Debt Held by the Public (~$26 Trillion)
This portion of the national debt is owed to external investors—individuals, institutions, foreign governments, and, notably, the Federal Reserve. It’s the debt that the government borrows from outside sources, which it must eventually pay back with interest.
Domestic Holders:
Roughly 40% of publicly held debt is owned by domestic investors. These investors include a variety of entities:
-
Mutual funds, pension funds, and insurance companies.
-
U.S. banks and corporations that buy Treasuries as part of their investments.
-
Individual investors who purchase Treasury bonds through brokers or retirement accounts like 401(k)s.
The Federal Reserve is a particularly large domestic holder, owning about 17% of the total national debt. As the U.S. central bank, the Fed purchases Treasury securities as part of its monetary policy to influence interest rates and manage inflation. During periods of economic downturns, such as the 2008 financial crisis and the 2020 pandemic, the Fed increased its Treasury holdings to stabilize the economy.
Foreign Holders:
Around 24% of U.S. debt is owned by foreign governments and investors. The two largest foreign holders of U.S. debt are:
-
Japan: The largest foreign holder, with roughly $1.1 trillion in U.S. Treasury securities.
-
China: The second-largest, holding around $775 billion.
Other countries—such as the United Kingdom, Luxembourg, Ireland, and Switzerland—also hold significant portions of U.S. debt, though their stakes are smaller. While the U.S. remains the world’s largest debtor, these foreign governments buy Treasury securities as part of their currency reserves and investment strategies.
2. Intragovernmental Holdings (~$7–8 Trillion)
The other portion of U.S. debt is classified as intragovernmental holdings, which represents money the federal government owes to itself. This may sound odd, but it’s an accounting mechanism.
Here’s how it works:
-
Federal trust funds—such as the Social Security Trust Fund, the Medicare Trust Fund, and the Civil Service Retirement Fund—collect more revenue than they currently need to spend.
-
Instead of keeping the excess cash in the bank, these funds buy Treasury bonds, which the government promises to pay back with interest when needed.
The Social Security Trust Fund, for example, holds over $2.8 trillion in Treasury securities, which it uses to cover future benefits for retirees. Similarly, Medicare and other federal retirement programs also hold substantial amounts of U.S. debt.
The Larger Implications: Who Benefits from the Debt?
It’s easy to think of the U.S. national debt as a one-sided burden, but in reality, it’s part of a complex financial ecosystem. Domestic creditors, including U.S. investors and the Federal Reserve, benefit from holding U.S. debt as a low-risk, stable investment. This has made U.S. Treasury bonds a key asset for retirement funds, banks, and investors around the world.
For foreign investors, particularly countries like China and Japan, holding U.S. debt is part of a broader economic strategy. By purchasing U.S. Treasury securities, these countries help maintain the value of the U.S. dollar, which serves as the global reserve currency. This system benefits not just the U.S., but also the global financial system.
However, there’s a flip side: the interest payments on this debt—currently over $400 billion a year—are a significant strain on the U.S. federal budget. As the debt continues to rise, the cost of servicing it could consume an increasing share of government spending, potentially crowding out funding for other priorities like education, healthcare, and infrastructure.
Why Does the U.S. Owe Money to Itself?
The concept of intragovernmental holdings may seem confusing, but it’s simply a way to track the surplus funds of programs like Social Security. These programs collect taxes from workers today, but they don’t always spend that money immediately. Instead, the excess is invested in Treasuries, which ensures that future payouts will be backed by U.S. government bonds.
However, this system raises concerns about sustainability. As the baby boomer generation continues to retire, Social Security and Medicare will require more funds to cover promised benefits. The government will need to either raise taxes, reduce benefits, or increase borrowing to meet these obligations. The intragovernmental debt is one of the many challenges tied to the future solvency of these programs.
The Global Implications: What If Foreign Countries Sell U.S. Debt?
The U.S. national debt is often portrayed as a potential vulnerability in America’s financial system—especially because foreign countries hold such a large portion. What happens if China or Japan decides to sell off their Treasury holdings?
In theory, selling large amounts of U.S. debt could push interest rates up, making borrowing more expensive for the U.S. government and for consumers. However, the likelihood of this happening is relatively low. Treasuries are considered one of the safest investments in the world, and selling them would hurt the value of the dollar—something that foreign creditors generally want to avoid.
Moreover, many countries—especially China and Japan—hold U.S. debt not just as an investment but as part of their own currency management strategy. The U.S. dollar remains the dominant global reserve currency, and a major sell-off of U.S. debt could undermine that status, potentially hurting countries’ own economies in the process.
The Future of U.S. Debt: Risks and Opportunities
The U.S. debt is a double-edged sword. On one hand, it allows the government to fund programs and support the economy through borrowing. On the other hand, it places a heavy burden on future generations, as the country will need to continue servicing this debt for decades to come.
As the debt grows, future policymakers will need to grapple with critical questions: How can the U.S. reduce its reliance on borrowing? Should it seek to balance the budget or reduce spending? Or should it continue to rely on foreign investors to finance its needs?
While the debt isn’t a crisis today, it’s clear that the U.S. will have to manage its obligations carefully to ensure the nation’s long-term financial stability.