The new Trump administration is experimenting a lot in economic matters. She learned that customs duties, although they increase tax revenue, also generate internal problems. They lead to commercial reprisals, make foreign goods more expensive, and thus cause inflation – or an increase in prices. So far, so good.
A recent proposal now evokes a selective defect on American debt. According to the Financial Times citing BloombergTrump suggested that
“The Elon Musk team responsible for improving government efficiency would have found irregularities when examining data from the US Treasury Department, which could lead the United States to ignore certain payments.”
The term “ignoring certain payments” is an understatement. Clearly, this means considering a selective defect, in other words not to reimburse all their creditors … individuals as well as state.
Not reimbursing your creditors allows you to voluntarily choose to pay some but no others. Trump evokes this as a means of geopolitical pressure or as a source of income for the state. The defect reduces national debt. But it is a risky idea. She threatens confidence in the dollar. Who wants to buy state bonds that could be worth 0, according to the mood of the sovereign?
Tax foreign investors
Economist Barry Eichengreen recently questioned the supremacy of the dollar on the first page of Financial Timesan event in itself. According to Eichengreen, Stephen Miran's proposal – Trump’s main economic adviser – taxing foreign holders of federal treasure titles would risk compromising international financial stability. The goal is to devalue the dollar to make American exports more competitive. Officially, the administration plans a “commission of use” levied on interest paid to foreign investors. It would be necessary to pay to use the dollar, owned by the United States.
The Trump government plays on words by reversing the “Commission of Use” tax. This direct debit on interest makes it possible to avoid international tax treaties. In practice, it is only foreign investors who pay. Disguised discrimination.
As Brad Setser has recently shown it on the social network Threats, more than half of American debt holders-owners of the United States Treasury-are individuals or American companies … who are likely to be spared by this defect. So who else has this debt? Two governments are at the top of the list: Japan and China.
China: 4 % of American bonds
Japan is still an allied country for the time being and could be exempt. Even if the Trump administration shows less enthusiasm towards Europe and its historic partners, the geopolitical alliance with the United States could still play a role.
China, on the other hand, still holds around 4 % of American obligations in circulation. If this figure may seem low, it represents a considerable sum. More importantly, China has money at stake, with more than $ 700 billion placed in its official exchange reserves, probably higher, taking into account unofficial reserves. Chinese semi-public institutions, such as banks and large companies, potentially hold even higher amounts.
Brad Setser recently indicated on threads that China gradually reduces its assets to American treasury bills. We do not know the exact amounts sold, but the transactions passing through Euroclear, in Belgium, offer an overview. Since 2014, China is actually seems to gradually disengage from the US dollar. It has gone from a creditor with 18 % of American shares to a little more than 4 % today.
China remains the second foreign holder of American bonds. Imagine now that Doge's geniuses or others close to Trump decide, for reasons of domestic policy, a selective defect towards China.
Premises with Ukraine
Geopolitics could play in two directions. China would reduce its exhibition before ideologues close to Trump took the initiative. Alternatively, she would pursue her own geopolitical objectives by preventing this risk preventively in the event of future tensions.
Russia also liquidated all of its American obligations before invading Ukraine. The risk of selective defect or financial attack was too large. When I was at the Central Bank, my colleagues and I only realized it after the invasion, although the information was before our eyes (which we had presented in an article after the fact).
Towards a sale of American bonds?
China still has a large amount of American bonds. If she hesitated to undertake this daring geopolitical maneuver, she would approach a situation where, from a financial point of view, the green light would be given. The idea of a selective defect could thus accelerate sales of American bonds by China.
If a selective defect should actually occur, the geopolitical consequences would not necessarily be the first concern. It would mean above all that the very gasoline of financial investments worldwide would be upset. The obligations of the American Treasury represent, by definition, the safest asset available, according to macroeconomics manuals.
If this active active person who was to fail, capital would immediately seek refuge elsewhere without necessarily finding it. For example, there are not enough German treasury bills, and those from other countries are more risky. This corresponds precisely to the definition of a global financial crisis. We are certainly not there yet. But if the Trump administration was to experiment with selective faults as it does with customs duties, the consequences would be much more catastrophic and immediate.
