A friend of mine asked me a deviously simple but complex question to which I do not know the answer. I was hoping that my esteemed readers might have an answer or know a source to go to for the answer. The question is:
When (not if) China decides to ask for all of its money back from the US government bonds that is owns, what happens if we cannot pay them? Do they get a lien on government owned property? A lien on all financial assets, like your 401(k)? Can they go after individually owned property, like your home or business?
A lender (like the bank for your home) has certain rights that are written out in an agreement like your mortgage. However, when the government issues bonds, there is no formal arrangement other than the promise to pay interest. The lender can return his bonds to the government and demand money for the current value. So what happens if there is not enough money?
I think it is a good question. What do you think? Please let me know.
You can look at Argentina as a good example of a country that recently defaulted on its bonds. After years of turmoil, what happened is that the debt was restructured. The creditors lost a lot of their money, and had to accept a longer payback schedule. That would happen to China and other U.S. creditors. They have no legal standing to seize the assets of private citizens or corporations as compensation for federal bond defaults.
ReplyDeleteAlan Greenspan believes that Congress with act before a default would happen. Our problem is that our political system is corrupted by money interests, especially Wall Street investment banks. He thinks a crisis in the bond markets would force Congress to raise taxes and cut spending pretty much along he lines of the Simpson-Bowles commission proposal. i agree that they won't do much unless forced by a bond crisis.
--David
David, there is a big difference between Argentina and the US and that is our dollar is the standard of the world financial system. If we default, will it force other countries to designate another currency? If that happens, it would very negatively effect our cost of living. Imported items would be priced in other currency and would probably jump through the roof. Most goods (cars, clothing, shoes,appliances etc) are made in other countries.
ReplyDeleteWe could not borrow from other countries as our creditworthiness would be worthless. Would you lend to someone who just declared bankruptcy? I would not.
I have asked several people in the finance business what they think will happen and it is interesting that most have not thought about it! Now that is scary.
I was only answering your question. In terms of international law and the ability of China to seize assets of private citizens or corporations, the U.S. would be in the same position as Argentina.
ReplyDeleteBecause the U.S. dollar is the reserve currency of the world, the economic consequences would be as you describe. I was simply responding to what I thought was a legal question about China's options in the event of a default.
There is no question that this can be resolved if Congress acts to raise taxes and cut spending. As Greenspan said, something along the lines of Simpson-Bowles would work, but it will probably take a crisis in the bond markets to get it done.
That still will not solve the cause of the problem, so it will return. The Wall Street banks are more than capable of repeating what happened in 2008. Have you been following the protests? It is very small at the moment, but at least it is a start.
--David