Former governor questions US debt service commitment
According to the World Gold Council, Mervyn King, former governor of the Bank of England, believes that in certain circumstances China’s assets in the US could be “annulled”. Mervyn King’s alarmist warning is made in an interview, entitled “Present perilous, future imperfect” that appears in the June issue of Gold Investor, a WGC publication. After pointing out that “China and other countries do not want to be in a situation where all their iternational assets are in effect dependent on the US”, he is quoted as suggesting that all China’s US assets could be at risk:
“Of course the US would not want to renege on its debts, but if some awful conflagration occurred, then all China’s assets in the US might be annulled.”
The choice of the word “annulled” suggests some kind of deliberate action. Under what scenario could this be even contemplated?
Does he have in mind some sort of armed conflict? That is suggested by his reference to an “awful conflagration”. He appears to be suggesting that if China and the US went to war, the US could cancel the Treasuries China owns (only those China owns?) and not repay (nor service the interest) unilaterally.
He does not say so, but of course this would cause all US Treasuries to collapse, and the US would not be able to issue new bonds.
If he means that the US would suspend paying interest or capital on the bonds that it owes to China (and its allies) only while the war went on, then he cannot mean ‘annulled.’
It is fair to point, as he does, to concerns that make it reasonable to have assets in a central bank’s portfolio that are not dependent on the goodwill of other countries.
It is also quite legitimate to consider extreme scenarios other than those mentioned by Mervyn King; e.g. that US fiscal deficits might grow out of control, ending in rapid inflation or even hyperinflation.