As of January 2011, foreigners owned $4.45 trillion of U.S. debt, or approximately 47% of the debt held by the public of $9.49 trillion and 32% of the total debt of $14.1 trillion. The largest holders were the central banks of China, Japan, the United Kingdom and Brazil. The share held by foreign governments has grown over time, rising from 25% of the public debt in 2007 and 13% in 1988.
As of May 2011 the largest single holder of U.S. government debt was China, with 26 percent of all foreign-held U.S. Treasury securities. China's holdings of government debt, as a percentage of all foreign-held government debt, have decreased a bit over the last year, but are up significantly since 2000 (when China held just 6 percent of all foreign-held U.S. Treasury securities).
So, in the worst case scenario of a default on the debt, what would happen?
In the situation where personal debt balloons out to the point where interest payments cannot be made, the assets are seized by the debtor.
Consider the hypothetical situation where the U.S.A, the government decides to print more money. That's risky because that would create inflation, devalue the dollar and more than likely become a process that spins out of control. Not a viable option. Consider the case of Germany 1922-1923.
Another alternative would be for the government to increase taxes and cut spending. That is usually the medicine prescribed by Dr IMF to countries such as Greece who are at risk of defaulting on their loans.Raising taxes is as appealing to a government as cutting their own throats.
On the other hand, cutting spending might well be a policy option.
This is because expenditures related to entitlement programs such as Social Security, Medicare, and Medicaid are growing considerably faster than the economy overall, as the population grows older.
These agencies have indicated that under current law, sometime between 2030 and 2040, mandatory spending (primarily Social Security, Medicare, Medicaid, and interest on the national debt) will exceed tax revenue. In other words, all "discretionary" spending (e.g., defense, homeland security, law enforcement, education, etc.) will require borrowing and related deficit spending. These agencies have used such language as "unsustainable" and "trainwreck" to describe such a future.
In the U.S. economy, spending on defense is a large portion of government spending which is a major contributor to the sustained economic growth of the U.S. economy. Opinions might vary on this but even if this is a false premise, political objectives and foreign policy demands mean that it is very unlikely that the government would opt to reduce spending on defense.
There is much more to consider on this subject but it is fascinating nevertheless.