Why Canceling Debt Held by China May Be ‘Worse Than Telling People to Drink Bleach’
The Debt

Why Canceling Debt Held by China May Be ‘Worse Than Telling People to Drink Bleach’

Kevin Lamarque

As President Trump and his administration have ramped up criticisms of Beijing’s response to the coronavirus pandemic, The Washington Post reported Thursday evening that senior government officials across multiple agencies are looking into ways to punish or extract financial payback from China.

Among the ideas that have come up at this preliminary stage, according to the Post, is a dangerous one: “Some administration officials have also discussed having the United States cancel part of its debt obligations to China, two people with knowledge of internal conversations said. It was not known if the president has backed this idea.”

When asked about it on Thursday, President Trump seemed to shoot down the possibility, saying that canceling debt could undermine the “sanctity of the dollar” and that he “can do the same thing, but even for more money just by putting on tariffs.”

‘Circulating in the right-wing media echo chamber’: The Post’s Tory Newmyer reports that the idea of canceling debt held by China “has been circulating in the right-wing media echo chamber for weeks” and that Fox News host Sean Hannity “mentioned it in nine different April broadcasts, repeatedly endorsing the move.” On Hannity’s show, Republican Sens. Marsha Blackburn, Tom Cotton and Lindsey Graham reportedly backed the idea.

Why canceling debt would be dangerous: At Politico’s Morning Money, Ben White explains why canceling debt held by China would be playing with fire:

“The Chinese own around $1 trillion in U.S. Treasury securities. … Any move to ‘cancel’ debt held by China — i.e. default on it — would destroy the full faith and credit of the U.S., send U.S. interest rates soaring and could ignite a global financial catastrophe. … The Chinese know we (almost certainly) won't do this. But just saying it out loud at least raises some risk they would start dumping U.S. debt which would be ... really bad for the U.S.”

And Peterson Institute for International Economics President Adam Posen tells Newmyer that trying to cancel debt held by China would lead to a selling spree by other foreign holders of U.S. debt — and a costly spike in interest rates. “In economic terms, this is worse than telling people to drink bleach for what ails them,” Posen said.

Trump advisers say no way: The risks involved in even floating the idea are likely why top White House economic officials quickly shot down the possibility of canceling debt. “The full faith and credit of U.S. debt obligations is sacrosanct. Period. Full stop,” White House economic adviser Larry Kudlow said. Senior economic adviser Kevin Hassett likewise told Politico that he would “never entertain any default on U.S. debt.”