Just who owns the U.S. national debt?

And as the cost of paying Social Security and Medicare benefits continues to rise, the national debt monster is going to be even harder to tame.

So far, the consequences of all this are hard to put your finger on. As Warren Buffett pointed out last week in his widely-read annual letter to shareholders (pdf file, page 16), a big reason we can fund our budget and trade deficits is that the U.S. is still an incredibly wealthy country with lots of stock, bonds, real estate and companies to sell. And we got that way because of the hard work of generations that come before us.

And American investors and companies also have investments in foreign countries. But as Buffett noted, last year marked the first time since 1915 that the net balance of this investment turned negative.

“Foreigners now earn more on their U.S. investments than we do on our investments abroad,” Buffett wrote to shareholders “In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience ‘reverse compounding’ as we pay ever-increasing amounts of interest on interest.”

The wealth gap between the U.S. and other countries — even those with huge, rapidly growing economies like China — is still big. That means our credit with the rest of the world should be good for years — if not decades — to come. But no matter how rich you are, borrowing on top of borrowing is not a great long-term financial plan.

“I believe that at some point in the future, U.S. workers and voters will find this annual ‘tribute’ (of interest payment on the debt) so onerous that there will be a severe political backlash,” Buffett wrote. “How that will play out in markets is impossible to predict – but to expect a ‘soft landing’ seems like wishful thinking.”

Observations (highlighted) on the debt from Warren Buffett caught my attention.