US debt tops $40tn: Who does Uncle Sam owe? No, it’s not China

On August 18, the United States confirmed that its national debt had surpassed $40 trillion for the first time in history. This staggering figure translates to roughly $117,000 for every American citizen or nearly $297,000 per household. While such large numbers may seem abstract, they raise an intriguing question: who does the world's largest economy owe?

To understand this, it's crucial to grasp what national debt is. Whenever a government spends more than it collects in tax revenue, the difference is known as a deficit. To cover this shortfall, governments typically borrow by selling Treasury bonds, bills, and notes to investors. By adding up the deficits over multiple years, a nation ends up with a national debt.

Historically, countries have utilized debt for various purposes such as funding wars, recovering from crises, and constructing infrastructure and technology for future growth. If an economy expands faster than the cost of borrowing, the debt becomes more manageable over time. This was the case after World War II when America's debt-to-GDP ratio reached around 106%, only to be gradually reduced due to strong postwar growth.

Japan, for instance, carries the highest debt-to-GDP ratio among major economies at approximately 200%, largely held domestically in yen.

In America's case, the $40 trillion debt is predominantly homegrown. Out of the total, $7.78 trillion is categorized as intragovernmental debt, essentially the government moving money from one of its pockets to another. The largest holder of these securities is the Social Security Trust Fund, which holds approximately $2.3 trillion. The remaining $32.27 trillion is debt held by the public, where the question of "who does Uncle Sam owe?" becomes particularly pertinent.

The largest portion of this public debt is held by domestic private investors, including mutual funds, banks, insurers, pension funds, and individual households. Collectively, these entities hold around $17.9 trillion, accounting for approximately 57% of publicly held debt. This means that if you possess a pension or an index fund with bond exposure, there is a strong likelihood that you are one of Uncle Sam's creditors.

Foreign investors hold around $9.35 trillion, roughly 29% of publicly held debt, which is less than a quarter of the full $40 trillion when intragovernmental debt is included. Contrary to popular belief, China is not the biggest foreign holder of US debt. The title belongs to Japan, a close ally of the United States, which holds approximately $1.21 trillion.

The United Kingdom follows with around $937 billion. Other significant holders include Belgium, the Cayman Islands, Luxembourg, and Ireland, primarily acting as financial centers for investors with no direct ties to these nations.