Financing US Debt: Is There Enough Money in the World – and at What Cost?


  • The views contained herein are solely those of the authors and do not necessarily represent those of the institutions with which the authors are associated. The authors thank Alan Meltzer, Brad Setser, two anonymous referees and editor Benn Steil for helpful comments.

John Kitchen

U.S. Department of the Treasury

Washington, DC 20220



With the outlook for continued US budget deficits and growing debt – and the uncertainties regarding their financing – we examine the role of foreign official holdings of US Treasury securities in determining Treasury security interest rates, and the resulting implications for international portfolio allocations, net international income flows and the US net international debt position. We update estimates of the relationship between Treasury interest rates and US structural budget deficits, and extend that empirical analysis to include foreign official and Federal Reserve holdings of US Treasury securities. Although relationships suggest that the world portfolio could potentially accommodate financing requirements over the intermediate horizon, substantial uncertainty surrounds the likelihood of that accommodation and the associated effects on interest rates and adjustments in international portfolios. Notably, unprecedented levels and growth of foreign official holdings of US Treasuries will be required to keep longer term Treasury security interest rates from rising substantially above current consensus projections.