The Chinese central bank for example holds over $1T in US Treasuries.

In the event of a war between China and the US, could the US simply repudiate this debt?

What would be the consequences of such a move? Would it be possible, legal, feasible, and/or useful?

Might such a move be considered non-credible? (I am thinking that for example, it may be that everyone presumes that when the two countries return to peace, the US will eventually meet those debt obligations regardless of what it says during the war -- and hence, any such repudiation would be non-credible.)

Is there any precedent for such a move?

And in the light of this possibility, is the Chinese central bank in fact paying an implicit premium for US Treasuries (as compared to say a friendly country like the Japanese central bank)?

  • 1
    $\begingroup$ This is an international site, so reference to "our government" is not appropriate. A more suitable title might be "Effect of repudiating government debt owed to an enemy country". $\endgroup$ – Adam Bailey Mar 13 '19 at 12:25
  • $\begingroup$ @AdamBailey: Don't worry, I am not an American. Our here is used in the generic sense. If you'd like I can replace it with one's, but that is overly pedantic. $\endgroup$ – user1180576 Mar 13 '19 at 13:26

The result of such a move would be that the US would have a reduced credit rating, and you'd have a government funding issue. Chinese investors would obviously cease to invest on the United States, which would force others to lose trust in the United States. The demand for dollars in order to invest in the United States would also fall, which could push the dollar index lower, but at the same time you could have rising interest rates as the pool of investing shrinks (an extreme for of stagflation). Part of this depends on how stable the rest of the world is however. That is a worse case scenario. If the rest of the world is in chaos as well, it could be plausible that the US may still be considered a "safe-haven" until it no longer is.

The net result would likely be a loss of trust in the dollar, a declining dollar index, inflation, and torn relations with China in the short-term. The mutual harm caused by such an event makes a cold-war unlikely, and certainly makes the US losing its credit worthiness unlikely.

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