China Warns On Republican Idea of Short Term National Debt Default

China is warning that a Republican idea to have a short term national debt default when evaluating the debt ceiling is a very bad idea. The issue is simply one of confidence.

China

China is, of course, the biggest foreign holder of United States treasuries and other government debt. The total holdings are in excess of a trillion dollars, but this is a figure that is actually lower than most people realize. Still, China has a vested interest in making sure that debt doesn’t default.

Republican Plan

The Republicans are playing with fire when it comes to the national debt cap. The idea some of them are now proposing is that it will be okay to let a short term default occur. Why? Well the primary focus seems to be to create leverage to force President Obama and the Democrats to cave in on spending cuts.

Can this work? I’m no savant when it comes to politics, so it is hard to say. What it can do is really crush the United States position as an economic power. If that sounds over the top, read on…

Confidence

Economics is all about faith and hope. Pull out a dollar bill. What makes it worth anything other than the paper it is printed on? Faith. It is backed by the United States government, which is promising to back it. When people invest in treasuries or buy dollars, they are expressing faith in the United States government.

Well, what happens if we default on our debt even for a short period? The confidence in the government starts to drop. Frankly, it would be a shock. The United States has always been the investment of last resort when things go to hell in a hand basket economically. Argentina may default on its debt, but the United States does not.

All of this would change with a default and would have major ramifications. The biggest would be in two areas – interest rates and the value of the dollar. In short, interest rates would go through the roof. At the same time, the value of the dollar would plummet. Credit would cost a lot more and your dollar would go nowhere near as far as it does now.

I am all for cutting the national debt, but this strategy is a bad idea. China is not happy about it and you can hardly blame them. The truth is, Americans should not be happy about it either.

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