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 [ Text Menu: Today's Stack of Stuff | Audio | About Ralph | Contact Ralph | Ralph Rant! ]October 30, 2014 

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The Ralph Rant



Screw the Chinese? Financial and moral considerations
Ralph Bristol
October 22, 2014

I hear comments from a cross-section of Americans, intelligent and not, informed and not, who share a similar sentiment – screw the Chinese. Their collective knowledge and perceptions include: (1) The Chinese are foreign policy and military enemies of the U.S.; (2) They are still communists, even though they’ve accepted some capitalism to increase wealth production; (3) They abuse civil rights and persecute dissenters, including Christians; and (4) they sell cheap goods made with cheap labor, to American consumers, depriving middle-class Americans of the jobs their parents had. All told, China is, or perceived to be, the single largest sponsor of evil intentions and actions against the U.S., and we help fund their evil ways with our trade.

The “screw the Chinese” alliance also notes that we the people have racked up trillions of dollars of debt, and that the Chinese own a disproportionate share of that debt. So why not just default on debt owed to the Chinese, and wipe it off our books? Who cares if the Chinese don’t like it, or if they refuse to trade with us? Who cares if the Chinese won’t buy our debt in the future? Who cares even if the interest rate goes up on our other debt? That might force lawmakers to cut other spending.

 While most of that sounds tempting on many levels, it would almost certainly backfire financially on taxpayers expecting to get rid of some of their burden by saying “screw the Chinese.”

While the Chinese hold more of our debt than any other single country, they still own only about one one-tenth of it. The debt they own, about $1.2 trillion, is part of about $12 trillion that is publicly traded on the world bond market. The price is influenced by events that either enhance or erode confidence in the debt. If the U.S., long the most reliable debtor in the world, defaults on debt held by China, would the U.S. decide next to screw other big creditors, or everyone? That single question would drive interest rates sky high.

 Interest rates paid by the U.S. float constantly by design. We have to make daily principal payments as the constantly rolling debt expires, as well as interest payments on outstanding debt.

 When we pay off principal, by the billions monthly, we have to borrow more money just to keep the total debt even, let alone finance the perennial deficits (new debt), which peaked at more than $1.5 trillion under President Obama, and have backed off only to about $500 billion this year– about where it was under President Bush.

 All new debt is issued at market rates. Defaulting on debt to China, if it could be done, would so rattle the market that market (including replacement debt) interest rates would go through the roof, and the resulting increase in interest payments would far more than offset any benefit we might get from eliminating the principal owed to China.

 With our level of debt, even if we shed that we owe the Chinese, any spike in interest rates will be hugely costly to U.S. taxpayers, unless it inspires congressional action to simultaneously cut other spending accordingly. That size spending cut is a very positive (in my opinion) policy to hope for and work toward, but if policy makers admit that one action would backfire on taxpayers unless the other happens, taxpayers might not be in as big a hurry to rush out and screw the Chinese.

 Bottom line: no consideration of defaulting on the debt to the Chinese can be transparent without disclosing the market costs of such a decision to the taxpayer. Conservatives and libertarians would logically insist that there be a simultaneous cut in spending elsewhere in the budget to offset the increased interest costs.

 As individuals, Americans routinely default on personal debt, and if we keep our credit nose clean for a nominal period of time, we can avoid not only the considerable cost of that debt, but most additional costs too. It’s “such a deal,” that seemingly good Americans avail themselves of liberal bankruptcy laws 90-thousand times a month, with the personal financial benefit easily washing out any less tangible moral hesitation. We are a nation of deadbeat debtors, with seemingly little moral qualm about reneging on personal debt, so I understand why it would then be popular to want to put this national tendency to use, relieving us of a collective financial burden, while at the same time screwing the evil Chinese.

 I can’t say that I concur with the widespread moral acceptance of this attitude, but the popular desire to screw the Chinese is consistent with the popular attitude in the U.S. toward debt obligation in general – about whether debt is an important moral obligation or not.

 Personal bankruptcy includes (a) a major financial benefit to the debtor, with (b) no admission or malice toward the creditor, and (c) a moral blindfold on the debtor to avoid the reflection in the mirror.

 Defaulting on debt to China would include: (a) national admission of malice toward the creditor, another world power; (b) a moral reflector shield (their failings are worse than ours), and (c) a financial cost, not benefit, to the debtor – the U.S. taxpayer. At minimum, that cost should be clearly disclosed before we follow the confusing moral trail toward default on debt to the Chinese.

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