So I have been reading lately about a possible currency war between the US and China. The US claims China is keeping the value of the yuan artificially low, and has been pressuring China to “fix it,” whatever that means.
In turn, I have read rumblings of China dumping their $900 billion + in US Treasury bonds on the market, which will supposedly further diminish the value of the dollar.
So-- CAN the US Gov’t just cancel the bonds held by the Chinese? What if the Fed says “Those bonds are worthless and we will not redeem them.” Is this legal?
Not sure about the legality question–I’d guess it probably would be. But two major problems with this scenario: (1) How do you know which bonds are held by the Chinese, since they were likely bought on the secondary market and are being held in the offices of some broker somewhere–possibly right here in the US? And (2), such a move would have the same effect and worse as what the Chinese are threatening in the first place, i.e., making the dollar worthless and sending interest rates through the roof. Aside from that, it would create absolute chaos in the financial system, when treasuries can no longer be relied upon as a safe haven.
”The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
One major effect would be that the United States would find it much harder to sell Treasury bonds in the future, to anyone. So either Federal spending would need to go down, or Federal taxs would need to go up, or both.
Since we are not on the Gold Standard anymore, the only reason our money is not simply worthless pieces of paper is the fact that it is backed by the Full Faith and Credit of the U.S. Government. If we started saying that such and such bonds were worthless, it would precipitate a financial crisis unseen in U.S. History. And it is unconstitutional…
OK, so it seems a straight cancellation is out of the question.
Now how about if it is framed as China is committing some crime by artificially lowering the value of US currency, playing with our economy or what have you.
What crime? federal crimes have to be defined by Congress in a federal law. The Prez or the Secretary of the Treasury can’t just say “that’s a crime - hand them over.”
Plus, even if Congress did try to make the conduct of China a crime, you still have the credibility issue - no matter how you dress it up, the US would be reneging on its debt. Countries that do that quickly find that no-one will invest in them, and their economies tumble.
It won’t have the desired effect. If they are seized, it will be one of the greatest financial crises in history. As bad or worse than the effect of China selling their bonds all at once.
There is not really a good reason that China would do that. The rumors are interesting, but there doesn’t seem to be any substance behind it.
If they sell them, the value of those bonds goes down as they do it, and they don’t get close to their $900B back. Conversely, we don’t suddenly need to come up with $900B, the real value would be much less.
I’m still curious about this, however. Would cancellation of bonds be illegal or unconstitutional? I’m sufficiently interested that I might start a new GQ thread if that’s more appropriate.
The Constitution is the Supreme Law of the Land. So violating it is violating the law, and thus, I assume, illegal. But Congress could strip the courts of jurisdiction to hear any cases challenging the validaty of a “Public Debt Cancelation Act” thus rendering it de facto legal.
Yeah, I get that, thanks, but what I’m asking is whether it is in fact unconstitutional. (Perhaps I should have qualified, "merely illegal).
From what I can see,, the constitutional clause in question is just a leadup to the Fourteenth Amendment provision that “we’re not gonna pay no Confederate war debts”. Does it really apply to the scenario we’re discussing here?
Treasury bonds are paid off at their face value, not their market value. And the US Treasury doesn’t have to come up with any money for them until they reach maturity, at which point the difference between their market and face values is nonexistent.
That’s my understanding. If someone (or some group of people) lend you $900 billion, that’s what you would need to repay - eventually. The contract is traded on the markets, but what is bought and sold is the right to receive repayment when the bond matures. And to receive interest on coupon dates.
But whatever the market value of the bond, the amount to be repaid on maturity is whatever amount was borrowed. And as you say, the closer to maturity we get, the higher the market value of the contract. That’s why (amongst other reasons) bond managers talk about “duration” and “modified duration”.
The US government borrows money in the form of bonds. It is able to do so at a low rate of interest, since people (investors) generally assume the US will meet these obligations and repay its debts. This is backed up by years of evidence - I don’t think the US has ever defaulted on a bond debt.
This is good for the US, because it can borrow money on the bond market at rates which are lower than many (most? all?) other nations. It’s good for the investors since they get a safe (albeit low-return) investment.
And all of this goes out the window the minute the US declares an intention to willfully default on a debt. People stop buying US bonds, so the US can no longer borrow at low rates.
The point of keeping the yuan low is to keep the whole US-China trade thing working from China’s perspective. China has ~$100B trade surplus with the U.S.– per year. While the value of Chinese exports to the U.S. are above $200B per year
So – and my fingers cramp as I write this - Bush is absolutely right this is an absurd threat made by folks who don’t understand this situation.
China dumping that $900B would be insane on their part: They would have to believe that the U.S. wouldn’t retaliate banning or restricting Chinese imports. I don’t (And more importantly I assume sane Chinese Officials won’t) t like China’s chances of making up the export as the ripples of the dollar collapse go out into the world. The Central Bank “gets it” – as they backed off quickly.
China and the U.S., at this point, are in this together and it is absurd for either side to pretend otherwise - ultimately though if NAtional pride overrides economic interest the U.S. would almost certainly “win” the re-ordering more than China would.