[UPDATE 8/26/11 - Welcome to visitors from Fox News!! You may also be interested in the post from the 8/17 update below and the poll off to your right. Check back regularly as I will be posting additional material on this topic - Ken]

[UPDATE 8/22/11 Click here to download or listen to an hour long interview with Jonna Bianco, the expert on the topic of China's defaulted bonds.]

[UPDATE 8/17/11 - See my followup post A US Tactical Advantage in an Economic War with China for info on an 8/22/11 conference call on this topic.]

Progressive rhetoric in the debt ceiling debate holds that if the US doesn’t raise the ceiling it will automatically be in default. This is an intentional lie told for political reasons. It has nothing to do with economic or budgetary soundness. Any default will arise from US actions after we fail to raise the debt ceiling, not simply because we fail to raise it.

But what if it were true? It might not be the apocalyptic event everyone claims. It depends on international response. After all, China has intentionally defaulted on trillions of dollars of debt and the PRC is doing just fine. So much for default being disastrous to a nation.

From 1900 to 1939, China issued bonds purchased worldwide and even recommended by the US government as a sound investment. These were long term bonds of the sort issued by governments around the world; the same sort of US bonds held by China today and which the US is said to be in danger of defaulting on.

Following the Communist takeover, the new government repudiated that debt and refused to pay it. It continues to do so. The American Bondholders Foundation values the defaulted bonds at “over $750 billion to American citizens who are holding full faith and credit sovereign bonds sold to them by the Republic of China. Worldwide, the debt China owes to all bondholders is estimated to be several trillion dollars.”

Despite being issued by a previous Chinese government, the current government of China owes this money under accepted and recognized international law. That law holds that an “… established and widely recognized government of a nation is liable under international law for the full faith and credit obligations of the established and widely recognized predecessor government of the same nation.”

China has practically acknowledged and accepted responsibility for the debt. In the late 1980s it settled some of these bonds issued in Great Britain to regain access to British financial markets. In the late 1970s China settled American claims for property nationalized by it in 1949. Jonna Bianco at American Bondholders Foundation reports that China has insisted the current Iraqi government be responsible for Iraqi debt accrued under Saddam Hussein. Of course, the PRC had no problem with accepting Hong Kong’s transfer to it despite not existing when the lease was drafted. Even the Left leaning Huffington Post and PBS acknowledge that such debt is not easily repudiated. Where there are questions, it is usually how much to repay and how to repay it. But the matter of whether the debt is valid or not is settled.

The US government has made any number of symbolic and meaningless protests in favor of the Chinese honoring their obligations. Other actions by members of Congress are more substantial. To date nothing has been done. Not by the US, anyway. China, on the other hand, has downgraded its US credit rating based on “…the US’s deteriorating debt repayment capability and drastic decline of the US government’s intention of debt repayment.” One assumes the news was delivered with a straight face.

China has intentionally defaulted on its obligations and has no plan to remedy the matter. The PRC enjoys international credit, investment and trade all while thumbing its nose at law and morality. Each time the issue comes up, it boldly restates its intentions not to pay. It simply continues to do business, ignores the protests and expects the world to follow its lead in refusing to address the issue.

Given that, why is anyone in the US worked up about a default that has not yet happened and will not happen even if the debt ceiling isn’t raised on Tuesday?

Speaking of the debt ceiling debate, here’s an idea. Since the Chinese owe US citizens billions of dollars and since they also hold billions in US debt, why don’t we just reduce our debt by the amount the Chinese owe us and pay the principle and interest to American citizens?

That injects billions into the economy without raising taxes, eliminates the need to raise the debt ceiling, reduces US debt, and avoids talk of a dubious default. It’s TARP, Qualitative Easing and Keynesian nonsense rolled up in a plan that puts American interests first, reduces taxes, increases savings and investment and stimulates economic growth all while keeping governmental ideas on how to do all that at bay.

By happy coincidence, the American Bondholders Foundation has a plan to do something quite similar to exactly that.

All it will take is an American government more willing to squeeze the Chinese government than it is to squeeze the American people. Comments are open … what say you?

FOR MORE LINKS ON THIS ISSUE:

Investor Alert: PRC Sovereign Bonds @ Global Securities Watch;

Congressional Endorsement of International Offset @ Global Securities Watch;