Communist China’s Other ‘Nuclear Option’

Would Communist China pursue the “nuclear option” in a potential trade war with America? That’s the warning by Yale economist Stephen Roach. He’s not talking about A-bombs, but rather Beijing’s holdings of American debt. The People’s Republic of China, Mr. Roach says, could go on a “buyer’s strike” at Treasury debt auctions — or, worse, “start to unload its outsize position as America’s second-largest foreign creditor.”Either possibility, Mr. Roach contends, “would be devastating for America’s deficit-prone economy” and, in the American bond market, “would unleash havoc.” Mr. Roach’s warning underscores the peril that America has placed itself in as a result of Washington’s fiscal profligacy. Of our ensuing Everest of debt, which has surged above the $36 trillion mark, some $29 trillion is held by the public — including $8.7 trillion by foreign governments and investors.That puts roughly 30 percent of the public debt in foreign hands — about six times the level in 1970, when foreign countries and investors owned but 5 percent of the debt, the Peter G. Peterson Foundation points out. Communist China owns about $1 trillion in American Treasury securities — $772 billion by Beijing and $233 billion by Hong Kong, per Mr. Roach. America, in letting its debt soar, has ignored the consequences of lending to hostile creditors.The debt danger adds urgency to the effort by Elon Musk and Vivek Ramaswamy to trim wasteful spending. Failure to tame America’s debt, the Congressional Budget Office chief has said, could spark a, as the Financial Times puts it, “Liz Truss-style market shock.” That was the debt market meltdown in Britain after Ms. Truss proposed a pro-growth tax cut. The potential threat from Beijing is all the more reason to put America’s fiscal house in order.That point is thrown into even sharper relief by the particular that this year America is, for the first time, spending more on the interest on its debt than it spends on our military. “Any great power that spends more on debt service than on defense will not stay great for very long,” historian Niall Ferguson says. That, he warns, was “true of Habsburg Spain, true of ancien régime France, true of the Ottoman Empire, true of the British Empire.”America’s crisis of debt is, in the longtime view of these columns, best seen as a symptom of the age of fiat money that began in 1971 when President Nixon closed the gold window. Under a gold standard, a run-up in federal spending — and debt — would have been impossible because of the discipline required by convertibility of paper money. In short, the debt crisis is intertwined with the monetary crisis — with dire results for America’s global standing.Yet Washington has been “cavalier” about the debt threat, Mr. Roach avers, with complacent Americans “claiming China wouldn’t dare flirt” with politicizing Treasury holdings “because it would hurt them more than it hurts us.” Quoth Mr. Roach: “Oh really?” While it might be “almost suicidal” for Beijing to “spark such a financial meltdown,” he counsels that “it is equally reckless to dismiss the ‘tail risk’ consequences of a trapped adversary.”Amid President Trump’s talk of boosting tariffs as a policy cudgel against China, Mr. Roaches urges American policy markers “to think less about unilateral actions and more about the retaliatory responses to those actions.” If Trump’s mantra to foreign countries is “America First,” Mr. Roach explains, an increasingly aggressive Communist Chinese camarilla has up its sleeves a number of “Trump Cards,” as he puts it, “to send a very different message.”Even so, it would be a mistake to allow America’s foreign-held debt to constrain America’s independence and freedom of action — at home or abroad. Trump is among those who have warned of the folly of America spending billions overseas to defend our allies in places like Europe and East Asia — all the while having to borrow the money to foot the bill from global adversaries like Communist China. What in the world is the logic in that?

Communist China’s Other ‘Nuclear Option’

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