My last article about the threat of China being overblown seems to have left out an important issue: debt. China owes about $1 trillion in US-issued debt. Scary, right? It should be scary . . . to China. Consider the following scenarios:
Scenario One: your business owes a bank a million dollars and cannot pay it. In that case, you have a big problem.
Scenario Two: your business owes a bank $100 million and cannot pay it. Now it is the bank that has the problem. Strangely, the bank may even try to partner with you to ensure that you do not default on this loan. Heck, you may even have more credit extended to you.
America has never defaulted on a debt (if you do not include the Confederate States of America) but what would happen if China tried to manipulate America through ownership of our debt? It is not like Saudi Arabia who could threaten to not sell oil on the world market. China’s “output” is excess money that needs to be safely invested. China’s dumping of our debt would devalue their assets.
Frankly, America could inflate away our debt to China and the world. We could default in total, or simply default on Chinese-owned US bonds. What would be the cost (other than in reputation) of doing so? Sure, our government could no longer borrow easily on the world market, especially from China. However, this would have the salutary effect of forcing Washington to live within her means without borrowing.
Paradoxically, a strategic default of only Chinese-held debt might make other nations more likely to buy American debt as they now know that we have wiped off of our books $1 trillion of debts. That would make it easier to pay back Japan…
(Excerpt) Read more at corybirenbaum.blogspot.com