The United States government is considering different ways to punish China for its mishandling of the coronavirus pandemic.
So far, President Donald Trump has hinted at slapping new tariffs on Beijing, which he says will not impact the phase-one trade deal that was signed earlier this year.
But a so-called nuclear option might be on the table, according to various reports in the press: canceling all or some of its debt owed to China.
Today, the U.S. owes about $1.1 trillion to the world’s second-largest economy as the communist government acquired enormous amounts of Treasurys. Beijing has reduced its holdings since 2011, but $1 trillion is still nothing to sneeze at.
Washington may decide to default on its obligations.
While most reasonable people do not anticipate the White House to take such drastic action, the Chinese government is preparing for the possibility. Officials are reportedly considering unloading large portions of its U.S. debt holdings.
Whether the U.S. defaults or China sells, it would seriously impact the bond market. Imagine flooding the economy with more than $1 trillion in U.S. debt!
The other issue is that borrowing costs would spike for the government, businesses, and consumers. Since the federal government would choose to abandon its obligations, the global economy would lose its trustworthiness.
File this for future reference.
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