Toby Nangle (2:54)

Well, here we're looking pretty narrowly at bonds and stocks.

Tim Harford (2:59)

That's Toby Nangle, a journalist with the Financial Times. He's been examining the value of American financial assets owned by European NATO members.

Toby Nangle (3:10)

So we're forgetting all the real estate and infrastructure projects, all that kind of stuff. So people who own Microsoft shares or lending money to companies or to the American government, that's all going to be included.

Tim Harford (3:23)

Like most developed countries, the United States allows foreigners to buy its financial assets, whether that's shares in American companies or American corporate or government bonds. They're IOUs that guarantee you a fixed return if you lend someone your money and which you can sell on yourself you if you want. And the thing is, a big chunk of these US Financial assets have indeed been sold to people or institutions outside.

Toby Nangle (3:50)

The U.S. it's around $12.6 trillion of U.S. assets that are held by European NATO countries.

Donald Trump (4:00)

Right.

Interviewer 2 (4:00)

$12.6 trillion, I'm going to call it. That sounds like a big number. Is it a big number?

Toby Nangle (4:05)

It definitely is a big number, yes.

Tim Harford (4:07)

Okay.

Interviewer 2 (4:08)

That's obviously a lot of money, but I don't know whether it's 1% or 10% or 70% of the outstanding universe of financial assets in the U.S. the.

Toby Nangle (4:19)

Market capitalization of all U.S. shares put together right now comes to around about $70 trillion. And if you thought just about U.S. government bonds, that's another $30 trillion.

Tim Harford (4:35)

When you also take into account corporate bonds, it looks like roughly 10% of these US financial assets are held by European NATO countries. But what do we mean by held?

Toby Nangle (4:49)

It's a great question because it's probably more accurate to say that it's held in European NATO countries rather than by the countries, because it's not the governments owning them. These are bonds and shares that are owned by private individuals who reside in these countries or people who live outside of these countries that just happen to hold these securities through either custodians or asset managers based in these countries.

Tim Harford (5:15)

Just because $12.6 trillion of shares and bonds are held in Europe, that doesn't mean they're owned by Europeans.

Toby Nangle (5:24)

So that 12.6 trillion has got a lot of noise in it. Deutsche bank have done some analysis and they estimate that maybe when we strip out things like the Chinese government's ownership of US Bond through Luxembourg and Belgium, that sort of stuff, everything drops down to around about $8 trillion. Now, we haven't done independent work, but I would have thought that Deutsche bank would have done a Reasonable job at that.

Tim Harford (5:52)

So it looks likely that a good.

Interviewer 2 (5:54)

Chunk of that $12.6 trillion figure is.

Tim Harford (5:57)

Isn'T within the control of Europe, although it's hard to be precise. But whether the number is 8 trillion or 12.5 trillion, why does it matter that Europe owns US financial assets? Shares and bonds are the building blocks of financial systems. So owning American shares or bonds gives you influence over a country's finances. If you own them, you can choose to, well, not own them anymore. Selling enough of them would drive down the price. If foreign investors sold vast numbers of shares, it would damage the US stock market and the wealth of the US as a whole. And government bonds are arguably even more important. If you sell those, that has two effects at the same time. It both drives down the price of bonds and raises the interest rate that the government has to pay when issuing new bonds. That makes it more expensive for governments to borrow money, which the US does a lot of. And if you sold trillions of dollars worth of bonds, you could cause some serious pain.

Interviewer 2 (7:00)

You've got $30 trillion of U.S. government bonds. So how much of those U.S. government.

Tim Harford (7:07)

Bonds are held in Europe?

Toby Nangle (7:11)

So again, held in Europe is the right question. And the answer, according to the US Federal Reserve, that's the US central bank, is around $2.8 trillion. Of that $30 trillion, it's about 10%. That's right.

Tim Harford (7:26)

Again, that number doesn't strip out the bonds held in Europe on behalf of non European investors. So it could be somewhat lower. Nevertheless, in theory, Europe could sell off its U.S. bonds and create havoc. In theory, could they do it because.

Interviewer 2 (7:45)

They don't personally own many of these assets?

Toby Nangle (7:50)

Absolutely right. Apart from the Norwegian government in their big oil fund, they've got a chunk. Apart from that, there aren't huge ownership positions directly from government to government.

Tim Harford (8:01)

The overwhelming majority of bonds aren't owned by governments. They're held by private institutions, such as insurance companies, banks or pension funds. And of course, individual investors too. Forcing them to sell would be a logistical nightmare. But even if you could organise a big sell off, it would come at a cost for Europe. Many European pension funds have invested heavily in US assets, and if they're suddenly worth much less, then Europeans will have a lot less in their pension pots than they thought. And that's not all.

Toby Nangle (8:37)

So one consequence of US bond prices falling is that actually that tends to push other bond prices around the world of other countries down as well. One of the things that happens when bond prices go down is that bond yields go up. That's like another way of saying interest costs. And so interest costs for governments around the world and also for households, for companies, they could also be pushed up by any rate, real sell off in the US bond market.

Interviewer 2 (9:08)

So Europe tries to give the US administration a bloody nose and suddenly we're all paying more for our mortgages and for our credit cards.

Toby Nangle (9:17)

That's right. I guess we'd be headbutting them and both coming out pretty bloody.

Tim Harford (9:21)

There's a paradox underlying this whole discussion. The US is almost unique in the scale of how many of its assets are held outside America. But is this a massive vulnerability or is it a source of influence?

Toby Nangle (9:37)

I think that it's probably best to talk about it as a statement of fact. It's about the degree of integration there is, how much our fates are bound together financially.

Interviewer 2 (9:45)

But the interdependence is real. Despite the fact that both sides of the transatlantic relationship seem to be feeling rather uneasy about this interdependence, it's not a thing that's easily going to go away.

Toby Nangle (9:57)

I completely agree with that.

Tim Harford (9:59)

Our thanks to Toby Nangle from the Financial Times. If you have any questions or comments, please get in touch at more or lessbc.co.uk we'll be back next time. And until then, goodbye.

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Helena Merriman (10:48)

If journalism is the first draft of history, what happens if that draft is flawed? In 1999, four Russian apartment buildings were bombed, hundreds killed. But even now we still don't know for sure who did it. It's a mystery that sparked chilling theories. I'm Helena Merriman and in a new BBC series, I'm talking to the reporters who first covered this story. What did they miss the first time? The History Bureau, Putin and the apartment bombs. Listen on BBC.com or wherever you get your podcasts.