Interesting line of questioning on the fact that foreign banks own half of U.S. debt for Greenspan before the Senate Banking Committee. It's good to see Greenspan clarify that foreigners are not dumping dollars, it's just that the value of the dollar is declining relative to the other currencies in their portfolio.
SEN. DEBBIE STABENOW (D-MI):
Turning to a different subject in terms of our debt, and this actually goes back to my concerns on manufacturing. But it relates indirectly to manufacturing, when we look at our dependency on inflows of foreign capital to finance economic activity. And then I would argue on the other hand our difficulty in enforcing trade agreements against those who own so much of our foreign debt, I think this is going to be making it more and more difficult for us. I would -- I'd welcome your thoughts on that. But when we look at the fact that -- and I have just a small chart, but in the last four years, foreign holdings of U.S. Treasury debt has gone from basically a trillion to $1.85 trillion. And about half of that's owned by China and Japan. And I think people would be shocked to know who else owns our foreign debt as we're talking about financing private accounts through Social Security or other privatization efforts or anything else that we're doing for that matter -- the war, anything else -- that South Korea, Taiwan, Germany, Hong Kong, OPEC, Switzerland; we have a lot of foreign entities that hold our debt, portions of our debt right now.
And I'm wondering at what point, particularly when we're looking at $2 trillion or we're hearing now 20 years down the road, two decades, potentially $5 trillion in new debt added, if in fact privatization in some part goes into effect of Social Security, at what point do you believe that we should be concerned that our foreign financing of our national debt is becoming too great?
MR. GREENSPAN: Well, Senator, we have a difficult problem that people find U.S. Treasury securities the safest in the world. And it's not as though we're forcing them to go buy our securities, nor do I believe we have any legal mechanism to prevent them from buying them in the open market, which is what they do. So I'm not sure how to address this issue because I'm not sure what we can do about it.
The notion, however, that came out, I think, a couple of weeks ago, that there was a significant move towards selling off U.S. dollar instruments by foreign central banks, that actually was not accurate. The extent of holdings remains very heavy for dollars as a share of their aggregate holdings. And part of the decline is -- very small -- is the very fact that if you take a portfolio with dollars and, say, euros, and the dollar's price falls relative to the euro, then the value of euros in dollar equivalents rises and that, therefore, it looks as though the dollar has gone down as a share of total outstanding portfolios, when indeed, it has not. And that's basically what the case is.
But on the broader issue you're raising, I'm not sure how to handle that because I'm not sure what the long-term implications are. You are quite correct at the moment, excluding the debt, U.S. Treasury debt held by the Federal Reserve, half of our debt is owned abroad. And I would assume at some point it has consequences, but I'm not -- I cannot tell you what they are.
SEN. STABENOW: Mr. Chairman, isn't it reasonable to assume, though, that when we add national debt, every time we are adding national debt we are adding opportunity for foreign investors to purchase those bonds? So that one way to stop the foreign holdings increasing would be to stop the national debt from increasing?
MR. GREENSPAN: Well, we almost -- we had -- believed we were going to run the debt down to zero, not that many years ago. That would have solved the problem.
SEN. STABENOW: I remember your being here with us in 2001 when we were talking about the wonderful problem of having too large of a surplus and the question of what we do about that.
I wonder if I might ask one further question? I know my time is up, but just --
SEN. SHELBY: Go ahead.
SEN. STABENOW: Thank you, Mr. Chairman.
One further question. It's similar in terms of what's happening abroad for us.
Would you -- would it be your position that free-floating currency is an essential element of efficient capital markets? And to that end, would you be supportive of mechanisms whose goals are to ensure that nations allow for floating currencies?
MR. GREENSPAN: Well, in general I would say flexibility, which is an extraordinarily valuable asset to the world financial system, is clearly advanced by having essentially a free-floating rate system, which is largely what we have. The difficulty is that numbers of nations find dealing with fluctuating or variable currencies difficult to handle for lots of different reasons, and they choose on their own to lock in against the euro or the dollar or a basket of something and accumulate or decumulate their foreign assets to sustain it. So it's largely actions taken by foreigners, not something which can be mandated by anybody; in other words, I'm not sure the mechanism that, for example, the IMF would be involved in to induce somebody to go from a fixed to a flexible rate -- they could suggest to them that it's in their interest, and indeed we do on numerous occasions, but there's no legal mechanism to create it because they always have the capacity of purchasing or selling dollar, yen, or euro or sterling assets in the marketplace and thereby create a non-floating currency.
SEN. STABENOW: One mechanism -- and I will close, Mr. Chairman. Thank you for your patience. But we do have in the Banking Committee -- I'm sure we will be hearing from Secretary Snow in his yearly report that he's required to give about countries that may be pegging their currency. And certainly many of us on both sides of the aisle have expressed concern particularly about China, and what the impact of pegging their currency has done in terms of the cost of goods and services in our country as well as selling into their country. And so there is a mechanism. If, in fact, the Treasury secretary would just simply certify that it's happening, at least internationally we would have the opportunity to make our case. And I'm hopeful the secretary will do that before the committee later this spring.
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