The debacle of the Biden debate puts $3 trillion of US debt in jeopardy

The costs of Joe Biden’s disastrous debate performance may be the highest for Asia — $3 trillion, in fact.

That’s roughly the amount of US Treasury debt on the balance sheets of Asia’s major central banks. Japan is the most exposed at $1.2 trillion, followed by China at $770 billion. Talk that President Biden’s re-election bid is doomed has policymakers fearing the worst for vast sums of state assets.

Never mind the epic trade wars that Donald Trump White House 2.0 would unleash on a region he has long blamed for all of America’s challenges. From his days as a real estate mogul, Trump thinks Asia thrives by stealing US jobs, income and wealth.

Ahead of the Nov. 5 election, Trump is predicting 60% tariffs on all Chinese goods and revoking Beijing’s “most favored nation” trade status. He has threatened 200% taxes on cars. He has even talked about replacing all US taxes with taxes on foreign goods.

Suffice it to say, most Asian leaders were hoping Biden had engineered this election. But his June 27 knowledge-challenged debate with Trump was a game-changer of the highest order.

Suddenly, the specter of Trump making giant trade deals big again seems the most likely scenario as the polls turn against Biden.

Panic among foreign reserve managers overburdened with dollars may be more acute given Trump’s ill-advised plans for a second term.

Businessman Trump, remember, has been a serial defaulter since at least the early 1990s. On the campaign trail in 2016, Trump spooked Wall Street by hinting at a US debt default.

“I would borrow, knowing that if the economy goes down, you can make a deal,” Trump told CNBC when asked about his fiscal plans. “And if the economy was good, it was good. So you can’t lose

In April 2020, Washington Post reported that Trump officials, seeking to punish China, considered canceling debt held by Beijing. With the US debt rising to $35 trillion, it’s not hard to see how much of a disaster that would be.

Anyone who thinks these fears are ridiculous hasn’t been paying attention to Trump’s political wish list.

Look no further than the “Project 2025” manifesto the Heritage Foundation wrote for Republicans. This could see Trump move to abolish the Federal Reserve, return to a gold-backed currency and implement a crackdown on financial fraud.

Trump has talked about devaluing the dollar to gain trade advantage, Argentina-style. Efforts during his first term to shock allies in Asia who are expecting US troops – including Japan and South Korea – are sure to be a key priority in a second.

On July 1, the Supreme Court ruled that Trump and future presidents are effectively immune for anything they do as an “official act.”

For Japanese Prime Minister Fumio Kishida, Biden’s major setback makes this year even more nightmarish. In early 2024, the Bank of Japan looked certain to end its 23-year quantitative easing regime.

Instead, Asia’s second-largest economy is shrinking, the yen is falling and China is slowing. Prospects are poor for broad-based wage growth to accelerate economic growth. And Kishida faces the real prospect of being ousted in September’s election within his ruling Liberal Democratic Party.

A cratering economy, coupled with financial scandals among party members, has lowered Kishida’s approval rating to 21%. Within Kishida’s party, the specter of Trump’s return would ring alarm bells.

The same goes for South Korean President Yoon Suk Yeol, who also spent considerable political capital cozying up to the Biden White House. Coupled with huge losses in Treasuries, Korea’s export-dependent economy could take a beating.

That’s not to say that all of Asia’s top leaders are sad to see Trump’s second-term chances skyrocket. North Korea’s Kim Jong Un would like to have a few more summits with Trump, perhaps in the Oval Office.

And while Xi may not relish the trade wars to come, China will welcome Trump 2.0 in other ways. Anything that alienates close US allies and pushes Washington into turmoil and dysfunction would play into Beijing’s hands.

That may be true even if Trump loses. There is a zero percent chance that Trump would graciously acquiesce and move on, virtually ensuring another similar uprising on January 6, 2021. When Fitch Ratings revoked Washington’s AAA status last year, it cited the polarization after that day.

All of which means America’s Asian bankers may have little choice but to fasten their seat belts and hope for the best, as $3 trillion hangs in the balance.