Who Is Going to Buy Our (Increasingly Expensive) Debt?

January 9 - The New York Times reports that after buying over $1 trillion of U.S. government debt, China is increasingly diverting money into their own economy - including a $600 billion Chinese stimulus plan.  In September, China overtook Japan as the largest foreign holder of U.S. debt, but recently Chinese policymakers have hinted that they intend to slow down U.S. debt purchases.  Reduced demand for U.S. debt could drive up the costs of borrowing right as the 111^th Congress and President-elect Obama are discussing a $700 billion to $1.3 trillion stimulus plan - to be paid for with deficit spending.   

In testimony before the Senate Budget Committee, acting CBO Director Robert Sunshine told Congress that for every $100 billion in additional federal debt, future taxpayers will probably have to pay about $5 billion a year in interest costs.  Sunshine warned that while a timely stimulus needs to increase aggregate demand as much as possible for a given budgetary cost, it is also desirable that efforts at short-term fiscal stimulus not significantly exacerbate the nation's long-run fiscal imbalance.