No, We Shouldn’t Cancel Our Debt With China

The idea is gaining traction among some on the right, but it would create many problems and ultimately cost American taxpayers.

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China has faced no small degree of scrutiny for its handling of the COVID-19 pandemic—the way it has stifled press freedom and tried to silence medical professionals who spoke out early on, the way it has engaged in propaganda and tried to deflect blame—and it’s unquestionably deserved. But one response peddled by populist conservatives in the United States would have disastrous ramifications, economists warn. 

Some Republicans have let their frustration with the Chinese Communist Party push them into embracing fringe policies such as “cancelling” the $1.09 trillion debt our government owes to China. “If the U.S. did anything to impair the liquidity of treasuries and have them stop being the gold standard of the financial system, it would make this crisis look like chicken feed. It would be a collapse of the global financial system, the onset of something worse than the Great Depression” said Douglas Holtz-Eakin, an economist who is president of the American Action Forum.

So how did the idea come about and who’s pushing it?  

Back in April, Sen. Lindsey Graham of South Carolina floated it in numerous television interviews. “China needs to pay,” he said on Fox News. He argued that it’s time to start “canceling some debt that we owe to China, because they should be paying us, not us paying China.”

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  1. Bob

    The obviois debt to cancel is the debt held by the Fed. But that debt costs us zero interest anyway.

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    W. Hartline

    Why not pay down our own sovereign debt to China with their own debts? Seemingly this would be an option that would both satisfy markets, calm nerves about a US default, and put a considerable amount of money on the table between our two nations. https://www.foxbusiness.com/markets/historic-chinese-bonds-trump-leverage-beijing

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    rlritt

    According to people I used to work with who live on NY, stiffing people to whom you own money is Trumps MO.

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    Tom B.

    Has the Right just found its analog of Modern Monetary Theory to embrace?

    I sincerely wish that this idea represented a few cranks on the right, but the combo of elected legislators, administration officials, academics, and journalists strongly suggests that there will be a big push coming to expand support for this self-destructive over-reaction.

    The advent of this idea also coincides with a big push of anti-China sentiment from the Right, which the Trump campaign has pushing and has then been utilizing in his reelection campaign.

    The combination of these factors -- multiple sources to spark sharing through social media, legitimate grievance towards China over (among other things) their handling of COVID-19, and reinforcement of an existing Trump-embraced anti-China narrative strongly suggest to me that this idea will gain a strong foothold in parts of the American Right.

    Here's hoping for a more in-depth analysis of this this idea (along with maybe a basic primer on sovereign debt) here at the Dispatch in the future.

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    Pat Riot

    Oh my freaking God, *gaining traction with some on the right* you say?

    The Right has indeed "lost it's mind" as Charley Sykes wrote...

    https://www.amazon.com/How-Right-Lost-Its-Mind/dp/1250147174

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  6. James Bennett

    How would that even work? Is there a giant stack of paperwork in the Treasury labeled "China debt". What would keep them from selling it to someone else?

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    Dave IL

    John Yoo has had some bad ideas in his time, along with strange Constitutional theory. This is his worst, and I think the author explains why convincingly. It is surprising that only 32% responded to a survey by agreeing that we should cancel our debt to China. I would have expected well over half, but I would prefer not to see any opinion surveys at all.

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      Rick Harlan

      I only knew him from the Law Talk podcast. I thought he seemed pretty bright, even sitting next to Richard Epstein. But the paper linked here is a mess. His only example of the US defaulting on its debt is the Colonies canceling British debt in the Revolution, forgetting that those debts got uncanceled eventually under the Constitution and the Jay Treaty.
      The rest imagines some grand decades-long strategy reminiscent of the early Cold War that we could never hope to carry out with brain trust we have running the foreign policy nowadays. I think this nonsense of his is just intended to play to the rubes in Trumpville.

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  8. tla

    From a practical matter, I'm not sure how this would actually work. It's not like we have direct debt with China. They own U.S. Government bonds which last I checked were pretty transferable. I mean even if we reneged on payments held to Chinese owned bonds, what's to prevent China from dumping the bonds before we put this into place (unless we do this is the dark of night)? If we were already worried about a deep economic recession because of the pandemic, I hate to think what this would do the financial markets and you can kiss goodbye to the US being the reserve currency of the world. I have to assume this just populist political talk.

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    Larry O

    Ack! Where's my Morning Dispatch! Ack!!

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  10. Melissa

    Oh my lord. Good starting point would be not to start an unwinnable war in Iraq in which we eliminate their government apparatus with the intention of just building it right up again (complications may ensue). Then under Trump borrow another couple trillions from the wallets of our children to subsidize tax cuts for wealthy people and corporations. Could have saved several times the suggested amount handily with either/both option.

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