As if China and Japan didn’t have enough to worry about, Americans may be about to put a defaulter-in-chief in the White House.
Somehow, the typical oh-Donald-Trump-can’t-be-elected assurances mean little to nations stuck with more than $1 trillion each of Treasuries on which The Donald says he’d effectively renege. “I am the king of debt,” Trump told CNBC, devoid of any sense of irony. “I love debt. I love playing with it.”
That’s exactly what Xi Jinping and Shinzo Abe have to fear if the serial bankruptcy-filer from Queens wins the presidency. Nothing Trump could do in his first 100 days in office would do more to roil global markets and upend America’s standing in Asia than playing fire with the one asset that still means something in this volatile world.
Washington, remember, has built a huge and innovative economy the world puts up on a pedestal, but Asia holds the mortgage. The region has about $3.5 trillion of Washington’s IOUs, led by China ($1.252 quadrillion) and Japan ($1.133 quadrillion). They hoard dollars because of deep trust in the Washington institutions. As Trump trolls creditors, he should consider how Beijing and Tokyo can hold a grudge — and have the leverage to express it.
In 2007, then-Sen. Hillary Clinton warned “we can too easily be held hostage to the economic decisions being made in Beijing, Shanghai and Tokyo.” Two years later, Clinton understood just how much, when on her maiden trip to Beijing as secretary of state she shelved concerns about human rights in favor of hawking debt. Putting the “our economies are so intertwined” line ahead of political prisoners and censorship showed that risks to financing deficits is the new evil.
By 2010, Chinese officials were indeed buzzing about punishing Treasuries to retaliate against policies Beijing found objectionable — like selling arms to Taiwan. Similar whispers greeted perceived meddling when blind legal activist Chen Guangcheng took refuge in the U.S. Embassy and after Washington’s self-inflicted debt downgrade in 2011. China is hardly alone in playing realpolitik with debt — look no further than Saudi Arabia threatening to sell Treasuries over U.S. probes into its role in the Sept. 11, 2001, attacks. But Beijing’s periodic warnings harken back to that day in 1997 when Tokyo shook the global markets.
In June of that year, then-Prime Minister Ryutaro Hashimoto was giving a dry academic speech at New York’s Columbia University. Things took a highly provocative turn when he admitted that “several times in the past, we have been tempted to sell large lots of U.S. Treasuries” amid disagreements. The dollar plunged, stocks tanked and Tokyo raced to reassure markets. Hashimoto’s broadside came just as Indonesia, South Korea and Thailand were hitting a wall, adding to the contagion oozing around the globe.
Japan resisted playing the Treasuries card. So has China, which long since surpassed Tokyo as America’s main banker. That could change as a man with a reasonable path to the White House threatens to play his own trump card with debt. Trump’s idea, as Nobel laureate Paul Krugman tweeted, amounts to “making America great by running it like a failing Atlantic City casino.”
Negotiating forgiveness of debt might be fine if Trump were vying to lead Argentina or Cambodia. Or if his administration were clearing up after a dictator whose family made off with tens of billions of dollars, like Ferdinand Marcos of the Philippines. In 2005, for example, lawmakers in Manila floated a plan to repudiate certain blocks of debt issued during the Marcos days that ended in 1986. Then-Sen. Manuel Villar called it a “creative response” to the nation’s fiscal woes. Might the newly elected Rodrigo Duterte, a man many see as the Trump of the Philippines, embrace the idea, too? It’s more than possible.
It would be disastrous for the U.S. to go down that road. Asians would scramble to find alternatives to dollars, not that there are many obvious options. Euros? Not unless you trust Greece isn’t about to implode anew. The yen? Not unless you think an aging, deflationary and politically adrift nation carrying humankind’s biggest debt load is a good bet. The yuan? Yeah, good luck as China’s bubbles deflate. Gold? Try finding enough as Trump makes the yellow metal great again and its value explodes higher.
Trump seems to forget that the sanctity of U.S. debt is a key pillar of American soft power. It’s taken many a hit over the last dozen years, from the Iraq invasion to President Barack Obama’s pivot to Asia that never happened to Washington’s downgrade. Congressional wrangling over the debt ceiling in 2011 prompted Standard & Poor’s to cut the U.S. to AA+ from AAA. As the state-run Xinhua News Agency said at the time: “China, the largest creditor of the world’s sole superpower, has every right now to demand the U.S. to address its structural debt problems and ensure the safety of China’s dollar assets.”
Rather than structural change, Trump would focus on the art of the deal.
One day after saying a Trump White House wouldn’t be aiming “to make things unstable for the country,” he explained how he’d export the pain. “I would borrow, knowing that if the economy crashed, you could make a deal.”
Pressed later, Trump insisted he’s not for defaulting. How else can we define asking folks holding a contract promising full payment to accept less? The Federal Reserve monetizing debt — and effectively taking it off the government’s balance sheet — would be controversial enough. But the world’s most advanced economy asking for debt forgiveness? How humiliating is that?
In less chaotic times, this mere suggestion would disqualify a candidate. But in the age of Trump, when anything goes, Beijing and Tokyo have every incentive to draw up contingency plans, investigate legal options and reduce exposure to a U.S. Treasury that might be run like an extortion racket. It would kill America’s clout in economic circles, make the Fed a laughing stock, cause havoc in markets and end all trust between business counter-parties. It would set a precedent from which the world wouldn’t soon recover after Trump returns to running casinos and waterfront property into the ground.
Here, the oh-Hillary-will-trounce-Trump line is cold comfort. That tens of millions would vote for a man holding such views is disturbing in itself. It’s bad enough for America’s bankers to threaten to call in loans for political gain. It’s just plain crazy to give Asia great reasons to do it.
William Pesek is executive editor of Barron’s Asia and writes on Asian economics. www.barronsasia.com
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