[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;
#1 by Eric Holcombe on 08/02/2011 - 05:03
The Super Congress explains a lot. Shell game/power grab.
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#2 by Matt on 08/23/2011 - 20:15
Great article! The U.S. Government failed to include these bonds when it negotiated a claims settlement treaty with the PRC, which is liable for repayment under international law as the internationally recognized government of China. This Civil Racketeering and Antitrust Complaint filed with the United States Department of Justice exposes the complicity of Standard & Poor's, Moody's, and Goldman Sachs in this travesty:
http://www.istockanalyst.com/article/viewarticle/…
#3 by Sid on 08/29/2011 - 04:00
You Americans are unbelievably stupid. You forget that you did the very same thing to Europe after the Civil War and changed your Laws to suit yourselves, and refused to pay back cotton bonds to bondholders in Europe, claiming the NEW Government wouldn't pay the OLD Government's debts. "At the close of the war, these foreign bonds were ignored by the re-established Federal authorities like all the other bonds of the Confederate government, or of state governments under the Confederacy." Now when China has done exactly same thing to you (see, history repeats itself but not so nice to be on the receiving end) you are such wimps. The world will laugh at your demise and it's coming. Sooner than you think. "Oh, but we've got a printing press we can carry on printing dollars", that is like saying to the bank when you're overdrawn "Oh, but I've still got checks in the checkbook".
Just keep doing it. The world is watching and waiting for your collapse. And we're buying gold, not dollars.
#4 by Blue Collar Muse on 08/30/2011 - 06:07
Sid -
We're not really stupid and the Union did not really do exactly what China is doing. Although you are right about the propensity of the US government to spend money it doesn't have and the eagerness with which many around the world anticipate a US demise. Generally left unconsidered in such discussions is who will save your ungrateful backsides from the real bad guys once we're gone but that's a comment for another day …
On to your points …
There have been any number of governments which have done exactly what China has done here – repudiate a valid debt. The US is not one of them.
You are not alone in commenting on perceived US hypocrisy in regards to the US government's repudiation of Confederate bonds. Unfortunately this is a position which only seems applicable and isn't completely thought through.
At issue here is the notion of successor governments. There is no successor government to the Confederacy. No one today is claiming to be the Confederate States of America. That nation ceased to exist when they were defeated in the war. Under international law there is no claim on the US for Confederate bonds since the US is not and does not claim to be the successor government to the Confederacy. Unlike China, Russia and others where the succeeding governments did make those claims.
Even the nature of the bonds are quite different. While some of the bonds issued by the Confederacy might be demonstrated to be efforts to raise money to build infrastructure for the new nation and things similar, by the end of the war, it cannot be claimed to be so.
The provision of the 14th Amendment were specifically to disavow responsibility for activities that were tied to the war effort of the Confederacy, not those legitimate activities engaged in by all nations. In addition, it was to disavow any responsibility to indemnify individuals for losses related to emancipation and other issues related to the cessation of slavery.
But they were not a simple repudiation of bonds analogous to the choices of China, the Soviet Union and others.
#5 by ELT on 08/30/2011 - 15:55
I love when really intelligent people start their rants with phrases like "You Americans are unbelievably stupid". To try to paint 300MM people with the same brush in one stroke is truly hilarious.
Anyhow, Blue Collar Muse is dead right; there has never been a legitimate obligation of the government of the United States of America that did not get paid on time, and in full; the Confederacy was never the legitimate government of the USA. This country has a peck of problems, but reneging on debt isn't one of them.
Sid, wherever you're from, I would suggest that you be honest and take a close look ot the country you're from. It's not the US, and it probably never will be. And if the PRC ever catches the US economically and culturally, it's not going to be easy, and it's going to take an awfully long time. They have their own internal issues. And they should pay their bondholders, just like the US does…
#6 by d myer on 09/02/2011 - 16:01
Interesting commentary on this protracted issue essentially stonewalled by PRC.
Failure to resolve this matter reflects our long years of all US political party genuflection to a communist totalitarian state that has the temerity and hypocrisy to lecture the US on its economic disarray.
Shame on our ratings agencies for their one sided approach.
#7 by Crakers on 01/01/2012 - 16:33
The government that issued the debts were the Republic of China, which is now commonly called Taiwan. Taiwan is the country that should pay the debt.
The China that now holds a lot of US bonds are called the People's Republic of China and it's totally a different government. If you wanna the Chinese government to pay, you should first admit that Taiwan is part of China. Simply said
#8 by Blue Collar Muse on 01/02/2012 - 18:34
Actually Crakers, you have your international law completely backwards.
The law of succession allows that the generally accepted successor government is responsible for the debts of the government it succeeds.
Not by my say so or by yours, but by the PRC's own say so – THEY are the successor government to the Chinese government that issued these bonds. Further, the PRC is the government which holds the seat for China in the UN and is represented by the Chinese Olympic team for just a few entries in a LONG list of evidence for the PRC being the government responsible for these debts.
However, the most compelling proof for the PRC being liable is that they already accepted responsibility for these bonds. They paid many of these bonds held by British citizens and the British government.
Given all that, it seems rather silly for them – and for you – to try and argue that China is not responsible.
#9 by Crakers on 01/06/2012 - 12:02
"The Republic of China (ROC), commonly known as Taiwan, is a unitary sovereign state located in East Asia. Originally based in mainland China, the Republic of China currently governs the island of Taiwan."
How is PRC responsible for the debt when the ROC government still exists, operating normally as they were before 1949? The only thing changed about ROC is that they moved from the mainland to the island, but the government itself never closed down.
It is true that PRC paid the debts to the British that were originally owed by ROC. But PRC did it because the government CHOSE to, not that they HAD TO do it. PRC want Taiwan to be part of its territory since 1949, and paying part of the debts was just a way of showing the ROC government that they want reunion. The PRC government never assumed the responsibility of the debts by paying some of them.
If you pay say, 5% of your best friend's mortgage, does it mean that you have to pay the other 95% as well?
And also, the Republic of China has its own Olympic team as well.
#10 by Blue Collar Muse on 01/07/2012 - 06:25
Not sure if you are intentionally avoiding the issue or simply aren't grasping it.
The PRC is responsible, under international law, because they are the generally recognized successor government to the Chinese government which acquired the debt.
This is true from the current world situation which exists, from the PRC's own unending proclamations of the same and from their own actions vis-a-vis this debt in the past.
You suggest a mortgage reference. Let me put it in correct context:
A man builds a house and begins to pay for it. A fight ensues with his neighbor over the house and eventually the man loses the fight and is thrown out of his own house and moves elsewhere. The neighbor moves in and for years enjoys all the benefits of home ownership. When asked by the people who financed the house's construction for payment on the note they are still carrying, the neighbor who has lived in the house for over 50 years claims he is not the owner of the house or the debt and refers the creditors to the displaced home owner.
Please … I was born at night but not last night. The PRC is playing both sides of the fence here. They have all the benefits accrued by being the de facto government of China but are repudiating all the accompanying responsibilities.
That it is coming to light just how seriously this is impacting citizens of the United States is not my problem. If the PRC truly wants to be seen as the good neighbor to the East, then it's time for them to act like it.
#11 by Crakers on 01/08/2012 - 16:34
Apply your mortgage example to your comments on the Confederacy here. The Union is the "neighbor" who got the house from the Confederacy and now the "neighbor" has two houses. He is enjoying all the benefits from having both houses but is repudiating all the responsibilities that come with the newly "won" house.
I found from your comments that you really like to talk about the international law a lot. Under international law, if PRC is "really" the successor government of China, than the Taiwan island should undoubtedly be part of the territory of China. But in reality, it's very obvious that you guys, along with the people in the White House, would rather claim that China and Taiwan are two different countries.
To be straight, my point is that PRC will and should pay the debt only when Taiwan truly becomes a province of China.
#12 by Blue Collar Muse on 01/24/2012 - 18:37
**sigh**
You are SO confused, Crakers.
My comments are not about who **you** think should be generally accepted successor nation. It is not about who **I** think it should be.
Perhaps if I say it plainly you might understand it. It's about who **the PRC** thinks it should be.
While THEY deny the debt, THEY demand everyone else acknowledge them as the only China. That is the hypocrisy.
And, lest you feel you've somehow scored points, it does not require the rest of the world forcing Taiwan into the PRC to have the PRC being recognized as the generally accepted successor nation to Nationalist China.
The PRC is that government. They owe the debt. Period. Keep on denying it if you wish. But it makes as much sense as you claiming the earth is flat…
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