1/18/2014

How China helps pay for Medicare, U.S. aircraft carriers | The Exchange - Yahoo Finance

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How China helps pay for Medicare, U.S.

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By Rick New m an
January 16, 2014 3:50 PM
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Aviation Boatswain's Mate 2nd Class Tyler Stives, from Spring, Texas, inspects a catapult after an aircraft launch aboard the aircr

Market News
Chinese holdings of U.S. federal debt hit a new record high toward the end of 2013. We should probably be

Earnings no
'spectacular

grateful.

02:25

At the end of November (the latest data available), China held $1,317,000,000,000 in U.S. Treasury securities.
If all those zeroes make your head swim, thats about $1.32 trillion, which exceeds the prior record, from 2011.

AmEx boos
Intel a drag

China has been the largest foreign holder of U.S. debt since 2008, when it overtook Japan, which is now No.
2.

02:11

Chinese holdings of U.S. debt strike some people as a national-security vulnerability, but thats largely a myth
fed by fear-mongering xenophobes. For one thing, the debt held by China only amounts to about 7.6% of the

Earnings fev
09:27

entire $17.2 trillion in U.S. debt. About two-thirds of the national debt is held in the United States, with roughly
45% of that held by government trust funds and other federal agencies, much of it taxpayer money slated to be
spent on Social Security and other entitlements. Overall, Uncle Sams portfolio of creditors is pretty well
diversified.

Data Disclaimer

Borrowing from all sources, including China, also helps Washington pay for more programs than Americans
finance on their own through taxes. A trenchant irony of Chinas lending to the United States is it helps pay for

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aircraft carriers, fighter jets, missiles and other military hardware that would menace China if there were ever
a standoff between the two nations.
"One big pot of cash"
Funds from China also help pay for Medicare, highways, education grants, prisons, food stamps and most
other things the federal government spends money on. A few programs most notably, Social Security
have a dedicated source of funding. Medicare is partly funded that way, but money for some parts of the
popular healthcare program for seniors comes from the Treasury Departments general fund. For the most
part, money from taxes and borrowing goes into the same pool at the Treasury, with no distinctions on how
dollars from different sources are spent. Whether the payments are derived from debt or taxes, its all one big
pot of cash, says Deborah Lucas, a finance professor at MITs Sloan School of Management.

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1/18/2014

How China helps pay for Medicare, U.S. aircraft carriers | The Exchange - Yahoo Finance
Chinas holdings of U.S. debt may actually be a bigger worry for China than for America. When people ask
how bad would it be for the United States if China withdrew its money, the answer is, 'how bad would it be for

China if the United States went bankrupt?' says Richard Kogan of the Center for Budget and Policy Priorities.
China has a big stake in the solvency of the United States. They want us to pay all their principal and interest
and keep buying the stuff they make.
Theres little or no evidence, in fact, that Chinas foreign-debt holdings have ever been used for political
purposes. China mostly invests its reserves the way any nation seeking financial stability would.
The vast scale of borrowing by the U.S. government is a different story altogether and a legitimate worry.
Washington has made halting progress on its debt recently, with the annual deficit dropping from $1.1 trillion in
2012 to $680 billion in 2013. That should fall to about $560 billion this year, according to the Congressional
Budget Office, and perhaps lower if the economy exceeds expectations and tax revenues rise.
Theres still no plan, however, for addressing federal budget gaps that are expected to explode starting around
2020, as spending on retiring baby boomers skyrockets. With luck, China will still have a lot of money to invest
by then and remain in an accommodating mood.
Rick Newmans latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on
Twitter: @rickjnewman.

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