On another forum, someone argued, that the US shouldn’t worry about its debt to Communist China, as it could just refuse to honour it after the next incident with China.
What exactly would happen?
Lets say it happens after something similar to the 2001 Hainan island plane collision, but in this case, the American crew are interegated and killed and the plane is “lost”.
Well, at a minimum we’d see a debt rating downgrade worse than one position. Those ratings come from the reliability that the debt will be repaid. Suddenly making that a political consideration would certainly remove that reliability because who could say when such would be used again?
I could certainly see something like if China goes nuts and invades Oregon or something (however that might be acheived) and it became an act of war. But even that might do it. I seem to recall that the US continued buying oil from Iran even while the hostages were being held, after all.
My guess is that the US loses the gold in Fort Knox and elsewhere in the foreclosure action. (It’s not now worth enough to cover the debt owned to China, but once gold prices skyrocket as a result of the repudiation of US debt, it probably will.) Also, the president and any other officials responsible for this action are impeached and imprisoned for tanking the world economy over less than ten percent of the US national debt.
Actually I imagine it would be the congress that would have to be impeached. They are more likely to something like this-they know the executive is around to argue against silly things and that gives them a free hand to be rediculous. But I like the concept-impeach everybody! Then we can hold an election and replace them with another set of Dems and Reps-who will repeat the mistakes of the past if the past is any guide.
One problem with your sceneario, impeachment does not allow for imprisonment. So after the election we just might end up back where we started. 
From a logistical point of view does the Treasury have the ability to say “these are the specific bonds owned by China and we’ll refuse to make coupon payments to those while still continuing to make good on all others?”
If the OP can imagine a scenario where the US refuses to pay part of its debt, I can imagine a scenario where we imprison those responsible for doing so.
The US needs imports. The only way you could get away with telling a major creditor to fuck off is to be an entirely self-sustaining economy that doesn’t import anything.
What will happen is that the U.S. will never have to worry about repaying loans again.
One tool that China could use is to seize all assets in China owned by U.S. corporations and U.S. citizens – and tell them that if they want to get paid for their assets, just go ask the U.S. Treasury.
I don’t think so. My understanding is that China just buys US treasuries on the open market like everyone else. And given that bonds are often traded after the initial purchase, I don’t think there’s really any way to nullify Chinese debt specifically. Even if the Treasury refused to send any checks to China, the Chinese could just sell their debt to a third party (presumably at some sort of discount) and redeem most of it that way.
I was actually wondering about this the other day. If China and the US fight a war (or the US and Japan, or the US and anyother country with large US debt holdings), will the US keep redeeming bond payments to China? On the one had, it seems crazy to send billions to a government that your fighting a war with, on the other hand, as described above, I don’t really see how the US gov’t could avoid it short of just not redeeming bonds at all (which given the usual need to borrow money during wars, seems unlikely)
interesting point. I wonder what happened at the beginning of WWII? I am sure at least a few US debts were held by Germany and or Japan. And the other way around. If not by Gov’ts, then by individuals. Were they canceled? Paid? held in escrow?
I wonder how many US treasury bonds Iran holds today. I bet it is quite a bit.
The Constitution specifically prohibits not honoring the debt. It’s in the 14th amendment.
That’s why this is a fantastical scenario.
Agree in the case of some minor spat, like the spy-plane thing. But it’s still hard to see the US paying out to someone they’re actively engaged in a war with. I’d suspect the SCOTUS would find some justification for ignoring the 14th in that case, or at least for delaying payments till the cessation of hostilities.
But this must’ve come up before. We’ve fought a bunch of wars since the 14th was passed, one of the countries involved must’ve owned US debts. Did we keep making payments in those cases?
I know payments of outstanding debts to the British gov’t after the Revolutionary War was a contentious part of negotiating an end to that war, and the existence of the 14th suggests post-Civil war debt was also something of an issue. So at least pre-Civil War, it seems apparent that wars voiding debts was seen as at least a possibility.
How does another country “foreclose” on the United States?
If YOU can’t pay your mortgage, your creditors ask for the money, and when you can’t or won’t pay the sherrif comes around and escorts you off the property and puts your belongings on the curb.
Who’s the sherriff in this scenario? The sherriff available is the People’s Liberation Army. A plan for the PLA to show up at Fort Knox and seize the gold inside is gonna be a bit complicated.
Again, it’s a fantastical scenario. Certainly the US would need to use the gold to barter for goods, because it won’t be able to pay for anything with US currency any more. Because countries other than China will be leery of doing business with the US.
Well, that might be harder than it looks, most US Citizens in China are former PRC nationals who got a US passport out of convenience. They would be better than connected to the Powers-that-be in China than the average Chinese citizen.
I’m curious about this too
Per the Office of the United States Trade Representative, US foreign direct investment in China is about $50 billion. So that would probably all be seized. Also, there are the exports from China ($365 billion last year). What will happen if that all stops?
What makes you think that there is really any gold in Fort Knox?
When was the last time there was any PUBLIC inspection and accounting inside?
As said earlier, this won’t happen because the constitution would not allow it: “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.”
Sovereign default has milder consequences than you might think, as certain Latin American countries discovered in the 1930s. For example, lots of capitalists are willing to finance trade for a price, especially when the goods themselves are collateral.
It also happens fairly often. The go-to book on the subject is This Time is Different (2009) by Reinhart and Rogoff. Table 2.1 (p.23) of the volume shows a long list of defaulters or restructurers (1970-2009). Fun fact (p. 87): between 1300 and 1800, France defaulted 8 times. Greece had 5 defaults or restructurings between 1800 and 2008 – Spain had 13. France and Germany each had 8 (Table 6.6). I found this book to be an eye-opener.