Donald Trump and his allies found a new reason to deride Mitch McConnell. The U.S. Senate minority leader refuses to let Washington default to show China who’s boss.
For now, at least. McConnell is no friend to America’s credit rating. He led the Republicans back in 2011, when the party held the debt ceiling hostage and cost the U.S. AAA status from Standard & Poor’s. This time, McConnell is still playing with fire.
Yet his decision to blink and agree to lift the statutory cap on borrowing so Washington can pay its bills, albeit temporarily, really irked Trump World.
“Looks like Mitch McConnell is folding to the Democrats, again,” Trump said in a statement. What the former president also means is that Republicans are folding to Xi Jinping’s China, which holds $1.1 trillion of U.S. Treasury securities.
Before he entered the White House in 2017 and launched a trade war against China, Trump pondered the mechanics of default. Six months earlier, Trump told CNBC that “I would borrow, knowing that if the economy crashed, you could make a deal. And if the economy was good, it was good. So therefore, you can’t lose.”
At the time, many wrote it off as the misguided ranting of a serial bankruptcy offender in his businessman days. Not so much. In April 2020, the Washington Post detailed how Trump officials, looking to punish China, mulled cancelling debt held by Beijing.
Thankfully, cooler heads prevailed. It’s never a good idea to insult and demonize your top bankers. Even worse to tease reneging on debt payments, daring them to call your loan. But with U.S. debt careening toward $30 trillion, Treasury Department officials managed to talk Trump out of a default that would make the 2008 Lehman Brothers crisis seem like a hiccup.
As dangerous as it is, the default drama at China Evergrande Group is largely a domestic problem. It’s one President Xi, his regulators and the constellation of state-owned banks and enterprises will have to sort out. The dollar, though, is the lifeblood of the global economy. Trouble there means trouble everywhere. Every asset class, every industry, every company and every consumer would be in harm’s way if the dollar crashed.
This is especially true in Asia, where you’ll find a critical mass of Washington’s top bankers. China and Japan alone hold a combined $2.4 trillion of U.S. government debt. That exposure is nearly equivalent to France’s annual gross domestic product.
Since the 2008 subprime crisis, officials from Beijing to Caracas to Moscow to Riyadh sought an alternative to the dollar. Printing the lynchpin currency of the global financial system, rivals realized, affords Washington outsized—and growing—geopolitical influence. Financial leverage, too.
In 2009, then Chinese Premier Wen Jiabao made a remarkable plea to American politicians. “We have made a huge amount of loans to the United States,” Wen said. “Of course, we are concerned about the safety of our assets. To be honest, I am a little bit worried.” He urged U.S. officials “to honor its words, stay a credible nation and ensure the safety of Chinese assets.”
Two years later, Wen looked borderline clairvoyant when S&P downgraded the U.S. In 2011, China reminded Washington that as a top financier, Beijing too could engage in brinksmanship.
China, the official Xinhua news agency argued in 2011, has “every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets. International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.”
Trump’s arrival in 2017 made Chinese leaders again seem prescient. He angled to weaken the dollar, Argentina-style, much to the horror of officials in Beijing, Tokyo and beyond. And as we learned later, he mulled defaulting just to hurt Xi’s China.
That would damage the U.S. more. The collapse in trust in the dollar would be a costly and lasting one. Surging debt yields and plunging stocks would devastate business and household confidence. Thankfully, Trump’s advisors pulled him back from the brink.
Yet now, Trump’s allies in Congress are a clear and present danger. McConnell, remember, is only giving President Joe Biden’s Democrats a temporary reprieve on the debt ceiling—until December. Trump ally Senator Lindsey Graham of South Carolina is complaining about McConnell’s “complete capitulation.” Trump whisperer Stephen Bannon told his podcast listeners to lobby McConnell to reconsider.
All the while, China’s $1.1 trillion bet on the U.S. keeps getting trumped. There’s a popular narrative that China’s vast dollar stockpiles give it immense influence over Washington. It’s really the opposite. If China began selling, markets would panic, sending turmoil back its way. Welcome to the dollar trap.
As Trump’s buddies do his bidding, it’s not just Xi’s China that is worried. Analysts at Moody’s Investors Service and Fitch Ratings are on the hot seat to join S&P in yanking away a AAA rating on which global prosperity depends.