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July 10, 2007

That could work

In The Check was in the Mail, the blog "Kids Prefer Cheese" explores the following idea. If at some future date, China nationalized the property of US nationals, that we seize their debt holdings of US debt to repay those affected. They seem to be in favor of the idea, and I think it is of interest not just in that context, but in the event of war against China, it would also do as a way to harm China's standing.

One of the comments they quote states "The enormous secondary market in T-bills means that China can easily sell them to some third party who could redeem them at face value. I can't think of any way to close this loophole without effectively shutting down all trade in T-bills, which has enormous negative consequences for the U.S." I'm pretty sure this is wrong. T-bills, like the vast majority of US financial instruments are registered (as opposed to bearer) securities. That is, there is a ledger either at the issuer of the security or at the holding broker dealer that indicates who owns the security and that they are to receive any payments associated with that security. So yes, there is a record that China is the owner of record of those securities. By simply publicly stating that those accounts are frozen and those securities will no longer be valid I think the US could effectively shut down the bond holds of China in the event of a conflict. Would that hurt US bond holdings? That's hard to say, but it isn't without president. I cannot seem to find the reference, but I recall that in there was a company that had a few contracts with Germany before WWI that it tried to enforce after hostilities ended. They found that those contracts were nullified by going to war with the other party's government. Therefore, I doubt that serious creditors would believe that their investments would survive a war between their country and the US.

Posted by OneEyedMan at July 10, 2007 12:02 AM

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