Photo above: The Hertford Bridge in Oxford, England. Used by Permission. © Tom Ley 01302 782837

Tuesday, March 9, 2010

Would Declaring the U.S. Bankrupt Provoke China to War? by James A. Davids

Two very different stories last Friday made me ponder the question above. In the first story, Pat Buchanan provided statistics on the enormity of the federal deficit. Mr. Buchanan related that if Congress eliminated both the defense budget (not a popular move in this Navy town I call home!) and Social Security payments (can you imagine the outcry?) next year, it would still be $160 billion short of balancing its budget. Looking at this gargantuan problem another way, Congress would need to cut spending 43% across the board or raise federal taxes by 72% to balance the budget. Buchanan predicted a revolution if the budget was ever cut this much, and a deep Depression if taxes were raised 72% and siphoned off so much consumer capital.

The Democrats have now controlled both houses of Congress for the last three years, during which our nation has witnessed the greatest explosion of deficit spending and debt since World War II. The very slight Republican majorities in Congress under President Bush were only “moderately” better (certainly not worthy of the support conservatives seeking limited government lavished on the Republicans). It appears that no one in Washington has principled leadership like Virginia Gov. Bob McDonnell and New Jersey Gov. Chris Christie.

The second story last Friday was about Detroit, the home of Government Motors. According to Bloomberg, at the same time Detroit was readying a sale of bonds to help close its budget deficit, it was warning investors of the risk of bankruptcy (although this honesty is quite refreshing, in my opinion this is not a good strategy to sell the bonds). Bloomberg further reported that last year “183 tax-exempt issuers defaulted on $6.35 billion of securities,” and that within the last two years, two cities (Menasha, Wisconsin and Vallejo, California) have sought bankruptcy protection and Harrisburg, Pennsylvania has said bankruptcy is possible. If local governments can go bankrupt, why not the federal government?

Throwing the United States into bankruptcy should be very attractive to the Washington pols who think the greatest evil possible is electoral defeat. A bankruptcy judge’s decision to cut spending across the board would be great cover for congressional Democrats, and the judge’s decision to raise taxes would similarly benefit congressional Republicans. The current bipartisan consensus on spending money we don’t have would crescendo in antipathy to the poor judge just trying to do her job.

If the GM bankruptcy is any guide to a federal government bankruptcy, the unions have nothing to worry about. It is the bondholders who are at greatest risk, and a huge holder of U.S. securities is Beijing. I understand that the debt to the Chinese is unsecured, so we need not worry that China will repossess three or four aircraft carriers, our military bases in Japan and Korea, or the State of Alaska. Yet, a claim in the bankruptcy court backed by the Chinese army would make any federal bankruptcy judge pause to consider the military repercussions of her decision. Would she grant preference to the Chinese over the Swiss, Dutch, and American bondholders?

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