Lindsey Graham has an idea. And it isn’t a good one.
During an appearance on the Thursday evening edition of Fox News’s Hannity (where sanity goes to die), Graham delivered a lengthy critique of Beijing’s role in the COVID-19 pandemic.
As is often the case with Fox’s programming, the English language fails as a sufficient tool when it comes to conveying the level of absurdity on display during Graham’s choreographed discussion with Sean, one of countless “interviews” the two men have conducted over the course of the senator’s metamorphosis from sharp Trump critic to sycophant.
To be clear, this deserves precisely as much attention as media outlets other than Fox have afforded it, which is zero. But, because Graham decided to weigh in on US debt, I’ll begrudgingly lampoon it.
During the exchange, Graham touches on everything from Wuhan wet markets to lab conspiracies to selectively canceling a portion of “the debt we owe to China”, as he put it. Although that latter bit garnered the most jokes on social media, his other remarks were equally inflammatory, if not quite as overtly foolish.
“Yeah, so the first thing I want to do is get the United States Senate on the record where we don’t blame Trump, we blame China”, Graham began, with videos of China’s open-air markets playing alongside him, for maximum effect. “The Chinese government is responsible for 16,000 American deaths and 17 million Americans being unemployed”.
Already, the conversation was off the rails. It is absurd to claim that no Americans (not a single one) would have died from COVID-19 if Beijing had only taken the proper steps to contain the virus and notify the world of the imminent danger to the international community. The only way that could possibly be a true statement is if COVID-19 were an engineered bio-weapon, and although Hannity and Graham (and the Daily Mail) are apparently fine with suggesting as much, it’s a wildly irresponsible claim to make (even tacitly) without concrete proof.
Additionally, the Chinese government is not responsible for US jobless claims. Again, mitigation efforts to contain the spread of the virus would almost surely have led to job losses irrespective of what China did in the early stages of its own outbreak. There is almost no chance the US would have had zero cases and therefore not found it worth implementing some lockdowns at the cost of some jobs had China only taken the “right” steps in late December.
Graham continued. “I wanna get the medical supply chain back into the United States and I want to stop [sic] canceling some debt that we owe to China, because China should be paying us, not us paying China”.
So, Graham said “stop”, but he meant “start” – Lindsey said he wants to “start canceling some debt that we owe to China”.
That suggestion is manifestly ridiculous for reasons that run the gamut from “conceptually silly” to “incredibly dangerous”.
Starting with the obvious, Treasurys are just securities. China can sell them. There’s a sense in which what Graham is suggesting would be akin to, for example, Walmart finding out that a sick customer who infected multiple employees while shopping is also a stockholder and then threatening to “cancel” that person’s equity stake in the company. Clearly, our hypothetical infectious shopper could just login to a brokerage account and sell his or her shares.
In that respect, Graham’s hypothetical selective debt cancelation is just nonsense. And I don’t even mean that in a pejorative way. Rather, I mean it literally. It’s nonsensical.
That said, these are USD obligations. At the end of the day, America can do whatever it wants when it comes to cutting off other countries from accessing the US financial system and US dollars more broadly. At least in theory, the Fed could try to seize custody holdings of US Treasurys or, for example, make it illegal to transact in US bills, notes and bonds with China or anyone acting on the country’s behalf.
Of course, that would amount to grand larceny on an unimaginable scale – a strange kind of international piracy, where the pirate effectively declares trillions of his own obligations contraband as part of a scheme to avoid repayment.
Taking this thought experiment a bit further, any such effort would be a logistical nightmare bordering on the impossible. As one veteran trader I spoke with on Sunday morning put it, “that’s f***ing crazy [and] would basically be an act of war”.
Last week, while discussing one of Howard Marks’s recent memos, I wrote the following about de-dollarization:
The dollar’s status as the world’s premier reserve currency is threatened more by US foreign policy than it is by any deficit, no matter how large.
For instance, the constant weaponization of the USD and the US financial system through draconian sanctions aimed at punishing perceived “foes” (sometimes for not very good reasons) along with the 2018 experience (when the rest of the world was again reminded that financial stability outside the US depends almost entirely on the Fed not erring by overtightening during a hiking cycle), are likely to be the key drivers of continued de-dollarization. Not deficits and not “money printing”.
Consider Graham’s selective debt cancelation idea “Exhibit A” of that dynamic.
It’s one thing for the US to leverage access to dollars in the service of, for instance, curtailing Iran’s nuclear ambitions or ousting NicolÃ¡s Maduro. You can, of course, debate the relative merits of those efforts, but neither is likely to lead to rapid de-dollarization by other nations.
Graham’s “suggestion” (to the extent it’s even possible), on the other hand, would likely set in motion a sweeping push towards reserve diversification with unimaginable knock-on effects in a world where US government obligations serve as the risk-free collateral that greases the wheels of international trade, commerce and finance.
Indeed, it’s worth noting that, during the initial stages of Trump’s efforts to squeeze Iran, Europe established a special purpose vehicle aimed at helping Tehran circumvent some Treasury sanctions in the interest of preserving stability in the country and averting a societal collapse that could destabilize the region. That SPV was, in essence, a de-dollarization push – and it was spearheaded by the UK, Germany and France (along with China and Russia).
From a 30,000-foot view, a decision by the US to deliberately default for the purposes of waging a financial war would create havoc across markets. It would be, for lack of a better word, chaos.
And that goes for all assets. Equities would crash, FX would be utterly haywire as nobody would be able to discern the ramifications for the dollar and there’s absolutely no telling how things would pan out in bond markets, which would be torn between a haven bid for Treasurys and the uncomfortable reality that the proximate cause of that very same bid is an intentional US default orchestrated by lawmakers who, at that point, would be widely seen as having totally lost their minds.
This would not be akin to the “technical” default often bandied about during standoffs over the debt ceiling. Graham’s idea is a one-way ticket to a complete market meltdown.
“They are all the same class and credit, it would be a general default and would cause a global recession far, far worse than the GFC”, one rates strategist said Sunday. “It would be a financial armageddon”.
While it’s true that, as Stephanie Kelton put it on Saturday, “the US doesn’t need to borrow from China or anyone else [and] never has to pay ‘market rates’ on any bonds it chooses to offer”, these obligations are already in the market.
Finally, it’s possible Graham’s suggestion runs afoul of the Constitution, but this is one case where that’s actually a minor point.
Ultimately, Graham’s comments to Hannity are the quintessential example of the famous quote often attributed to Abraham Lincoln: “Better to remain silent and be thought a fool than to speak and to remove all doubt”.
If you’re wondering where Graham got this idea, it’s likely he and Hannity were looking to magnify remarks made during a Monday Fox segment that found Tucker Carlson interviewing Gordon Chang, a senior fellow at the Gatestone Institute, which habitually produces inflammatory anti-Muslim content, often republished on right-wing blogs.
I’ll leave you with the transcript of that exchange.
TUCKER CARLSON (HOST): So you mentioned that they hold over a trillion dollars in Treasurys, in our debt. Why wouldn’t we just unilaterally forgive our own debt?
GORDON CHANG (SENIOR FELLOW, GATESTONE INSTITUTE): Well, if we were to do that, and we could easily do it, China would do a couple things. First of all, it would say that it was a repudiation of debt, and then they would bash us. They would say that we’re not a responsible member of the global financial system. They would then try to dethrone the dollar. Now, I understand what you’re thinking. But the point is that we can sort of avoid those types of charges if we work with the issuers of the other major currencies, and then China is left with no arguments in that regard.
CHANG: It sounds hard to do that, but nonetheless, when we see what’s happening in England right now, especially to the prime minister, I think that the anger there is enough so that we could actually build that coalition to actually get the other issuers to work with us.
CARLSON: Boy, I think that sounds absolutely worth doing.