This is the question that economist Bruce Bartlett asks this morning over at Forbes. As with all his articles, Bartlett tackles an interesting issue. It’s one where people have many preconceptions that are incorrect. As always, he does a terrific job at explaining the problem and its implications (especially since this time he refrains for saying that the only solution to our fiscal troubles is the implementation of a VAT without even reforming entitlement spending.)

First, let me say that foreigners own much less of our debt than you may think. I made this chart to show how much our debt “held by the public” is held by foreigners versus domestic investors.

Until the 1970s, Bartlett explains, foreigners owned less than 5 percent of our debt. Today, they own roughly 50 percent. That share is increasing as we can see in this chart.

Second, the Chinese own less of our debt than you may think. According to the Treasury Department, they own $894 billion out of the $3.6 trillion owned by foreigners. Bartlett argues that Chinese ownership is likely understated and is probably over $1 trillion.

But should we care that the Chinese or others own so much of our debt? Not really, Bartlett explains:

“The Chinese dilemma reminds me of a quip once made by economist John Maynard Keynes: “Owe your banker £1,000 and you are at his mercy; owe him £1 million and the position is reversed.” (The quote can be found in his collected writings, vol. 24, p. 258.)”

It doesn’t mean that we should be complacent about this increased foreign ownership of our debt. But, as long as the national debt is denominated in dollars, we are okay. To the extent that there is a risk it is the following: if foreign investors fear that the dollar will drop against their currency they could demand a higher interest rates as compensation, or they could insist that the Treasury issue bonds denominated in foreign currencies. This would be bad because it would shift all the foreign exchange risk to the taxpayer.

As Bartlett notes:

“While the U.S. Treasury has never issued bonds denominated in foreign currencies, it is conceivable that it could be forced to do so if the dollar falls sharply and foreign demand for U.S. bonds wanes. That will be the point at which our debt problem becomes more than theoretical and we are really on the road to national bankruptcy.”