The new year came with a new, staggering milestone for the U.S. The national debt breached $34 trillion. The latest spending package from Congress won’t help chip away at the mounting total, which has doubled in the last decade.

Who buys all of the debt? Here’s a look at the lenders to the United States.

Foreign holders

It’s well known that China is a major holder of U.S. debt. But according to Treasury Department data, the No. 2 economy appears to be dumping U.S. Treasuries over the years.

From August 2022 to October 2023, data shows an 18% drop in China’s holdings. However, analysts are split on whether China is actually dumping dollars or just moving them to offshore agencies.

China is not the foreign country holding most of the bag. That goes to Japan, which holds around $1.1 trillion in U.S. Treasury securities. China is second on the list, followed by the U.K.

The list of foreign countries holding U.S. debt accounts for less than a quarter of the purse. So who holds the rest?

The Federal Reserve

“The buyers for U.S. debt, I think, can be usefully grouped into three categories,” said Charles Calomiris, professor emeritus at Columbia Business School. “First, the Federal Reserve, which buys the U.S. debt currently as part of their own desired monetary policy.”

The Fed’s recent actions are top of mind. At the onset of the COVID-19 pandemic, the Fed heavily relied on these purchases to steady economic turmoil. Eventually, after its asset holdings ballooned and the economy seemed steady, the Fed committed to tapering its holdings.

Our asset purchases have been a critical tool. They helped preserve financial stability early in the pandemic and since then have helped foster smooth market functioning and accommodative financial conditions to support the economy.

Jerome Powell, Federal Reserve chair

“Our asset purchases have been a critical tool,” Federal Reserve Chair Jerome Powell said in November 2021. “They helped preserve financial stability early in the pandemic and since then have helped foster smooth market functioning and accommodative financial conditions to support the economy.”

According to the latest Treasury Department data, the Federal Reserve currently holds more than 16% of the national debt.

The Hedgers

Calomiris says the second group that buys U.S. government debt is hedgers. Hedgers include things like pension funds and insurance companies. As long-term, low-risk investments, Treasury securities are a natural hedge.

Then there’s one group of hedgers that owns a whole lot: government accounts. The Social Security trust fund, federal employees’ retirement funds and more all buy Treasury securities. Together, government accounts hold more than one-fifth of all the national debt.

“The Fed and the hedgers really are willing to buy the debt without any kind of speculative belief being expressed about whether things are going to go right or wrong,” Calomiris said. “Hedgers really don’t care.”

If you add Federal Reserve holdings and government account holdings, more than one-third of all U.S. debt is held by agencies that tie back to the U.S. government.

The Speculators

“The third group is the public in general or investors in general, within and outside the United States,” Calomiris said. “Those people include sharp-penciled investors who are sometimes called the bond vigilantes because they’re worrying ahead and thinking ahead.”

“So it’s really those three groups and I think part of the problem in the last decade has been that the size of the demand coming from the first two groups has been so large that it’s kind of insulated the government debt markets from seeing this longer-term problem and making it visible in interest rates,” Calomiris added.

Bond vigilantes are bondholders who either threaten to sell — or do sell — large amounts of U.S. debt to send the government a message on spending.

Selling bonds depress their value, pushing interest rates up. At its core, it is investors demanding higher compensation to lend the government money, which is what happens when one buys U.S. Treasuries. This vigilantism helped push a recent peak in October 2023, when the 10-year Treasury market yield topped 5%.

But what happens if higher interest rates aren’t enough to attract buyers? If the government wants to take on more debt but bond auctions fail to attract outside buyers, the government turns back to group No. 1, the Federal Reserve, to fund it.

“The central bank has no choice but to step in and mop up the mess caused by the fiscal authorities,” Calomiris said. “Every inflation in all of history has been caused by that. And that is exactly what our risk is, again, for us today.”