Press freedom has never been more vital. Without it, I wouldn’t have colleagues across the globe telling the stories of the millions affected by the coronavirus pandemic. Without it, we couldn’t ask tough questions of the leaders entrusted to contain it. It is a privilege to do my job every day, to make sense of the economic consequences of this unprecedented shock. If you subscribe to The Washington Post, thank you. If not, celebrate World Press Freedom Day with us by purchasing a subscription. 

with Brent D. Griffiths

As the Trump administration mulls retaliating against the Chinese government for mishandling the coronavirus pandemic, there's one option in the mix that's sending shock waves through the ranks of economists and bond market investors.

Administration officials have talked about having the United States “cancel part of its debt obligations to China, two people with knowledge of internal conversations said,” per Jeff Stein, Carol D. Leonnig, Josh Dawsey and Gary Shih.

The results of such a move, debt experts agree, would range from awful to unthinkable. 

“In economic terms, this is worse than telling people to drink bleach for what ails them,” Peterson Institute for International Economics President Adam Posen tells me in an email.

It’s not clear how far the discussions have gone.

The general idea would be to allow Americans to sue China for coronavirus-related claims in U.S. courts. The U.S. would pay out any damages “by canceling the equivalent to what you were awarded from the amount the U.S. owes China on our debt,” Cowen Washington Research Group's Chris Krueger writes in a note. 

President Trump appeared to distance himself from the move following The Post’s report on Thursday. “You start playing those games and that’s tough,” he told reporters. “We want to protect the sanctity of the dollar.”

And White House economic adviser Larry Kudlow said it was “absolutely and unequivocally untrue” that the administration was considering the possibility. “The full faith and credit of U.S. debt obligations is sacrosanct,” he told CNBC’s Eamon Javers. “And so is our commitment to maintaining the U.S. currency as the world's reserve currency.”

But the idea has been circulating in the right-wing media echo chamber for weeks. 

Sean Hannity, the prime-time Fox News anchor and Trump confidante, mentioned it in nine different April broadcasts, repeatedly endorsing the move. (“And as for China, you should not get your debt back,” he said April 28; “My feeling is we shouldn't pay it back,” he said April 23; “They do hold a lot of our debt. I would say China should pay,” he said April 21.) Republican Sens. Lindsey Graham (S.C.), Tom Cotton (Ark.) and Marsha Blackburn (Tenn.) also embraced the idea in appearances on the show.

Those who study debt markets see the move setting off a calamitous chain reaction.

Posen says it would be legally impossible for the administration to only default on some of the federal government’s debt obligations. But if it tried, “then every foreign holder of U.S. debt will sell off at least part of their holdings immediately.” 

Wrightson ICAP chief economist Lou Crandall agrees it would set off a “fire sale." Before the pandemic struck, China held $1.09 trillion in U.S. debt, making it second only to Japan as our top foreign creditor.

The federal debt pile is growing rapidly now. The government is borrowing at levels not seen since the end of the Second World War relative to the size of the economy in order to finance the emergency response to the pandemic-induced shutdown. The deficit is set to quadruple to $3.8 trillion this year, a record, according to a projection by the Committee for a Responsible Federal Budget.

Basement-dwelling interests rates are offsetting the cost of the country’s extra spending for the time being. But Posen predicts a selling spree by foreign creditors that would cause interest rates to spike. 

“This will also lead to an immediate sell off of the dollar, as investors will lastingly re-evaluate downward what share of their money to put in the U.S.,” he writes. “So the good medicine we would be cutting the U.S. economy off of is the ability to borrow in our own currency at low interest rates when we need to do so. And we really need to do so now when the deficit will exceed 12% of GDP this year.”

University of Michigan economist Justin Wolfers agrees:

The consequences would also spill out into the real economy. “You’d notice interest rates rising, possibly a lot," translating into higher costs for business loans and mortgages, says Guy LeBas, chief fixed income strategist at Janney Montgomery Scott. 

His conclusion: “The higher cost of borrowing from strategically defaulting on U.S. government bonds overwhelms any short term gain from it, probably by orders of magnitude.”

Market movers

About 30.3 million Americans have sought unemployment in the past six weeks.

More than 3.8 million people filed for unemployment in the past week: “The outbreak and subsequent recession have wiped away all jobs created since the Great Recession. Economists estimate the national unemployment rate sits between 15 and 20 percent, compared to about 25 percent at the peak of the Great Depression,” Rachel Siegel and Andrew Van Dam report.

The approximately 30.3 million figure “represents roughly 1 in 5 American workers. There is no precedent for figures like this in modern American history.” 

Dow drops 300, but Wall Street finishes its best month in more than 30 years.

Another round of dismal data deflated gains: “The Dow Jones Industrial Average closed 288.14 points lower, or 1.2 percent, at 24,345.72. The S&P 500 slid 0.9 percent to 2,912.43. The Nasdaq Composite fell 0.3 percent to 8,889.55,” CNBC's Fred Imbert and Thomas Franck report.

“The sharp rise in jobless claims and the precipitous drop in consumer spending come as businesses are forced to shut down and consumers stay home amid the coronavirus pandemic. Stocks were also under pressure … after the European Central Bank refrained from increasing its emergency asset purchase program.” 

The earnings callback

Two tech giants highlighted the heart of earnings season.
  • Amazon's sales soar, but costs rise: “Sales soared to $75.5 billion in the first quarter, up from $59.7 billion the same quarter a year ago, the company reported . But profits fell 29 percent to $2.5 billion,” Jay Greene reports from Seattle. “Now, Amazon plans to spend at least $4 billion in the current quarter to add warehouse and delivery workers, test its staff and provide them with personal protective gear so it can unclog its network that still struggles to meet customer demand for household staples such as toilet paper and bleach.” (Amazon CEO Jeff Bezos owns The Washington Post)
  • Apple's revenue barely increased: Second-quarter revenue inched up 1 percent, Reed Albergotti reports. “Apple said revenue in the second quarter totaled $58.3 billion. iPhone revenue was $29 billion, down from $31 billion a year ago. Profits fell 2.7 percent to $11.3 billion.”
  • McDonald's missed estimates: “In the United States, the company’s biggest market, drive-thru orders have risen to 90 percent of sales during the outbreak, up from about 66 percent normally, and its ability to offer quick, affordable food will be an advantage in coming months, executives said,” Reuters's Nivedita Balu and Hilary Russ report. The company said nearly all of its China locations have reopened, but demand has remained low.
  • Twitter gains users, but still shows concerning trends: “The San Francisco-based social media company said daily users who can view ads also grew 24 percent to 166 million, about 2 million above estimates, as people looked to Twitter for information related to the virus,” Reuters's Paresh Dave and Elizabeth Culliford report.

Coronavirus fallout

In the U.S.:
  • There have been 1.06 million cases reported, and 62,560 deaths
  • Administration hopes to have vaccine by January: “The January timeline represents a fast pace for vaccine development but still means there would be no fail-safe protection from the virus until long after most Americans are likely to have returned to work or school and until after the November presidential election,” Anne Gearan, Felicia Sonmez and Erica Werner report. “Anthony S. Fauci, the United States’ top infectious-disease specialist, said the goal is production of hundreds of millions of doses by January, an effort dubbed 'Operation Warp Speed.'”
  • More airlines move to make masks mandatory: “American, Delta, Frontier and United announced that starting this month, passengers would be required to wear masks or facial coverings when they fly. The shift comes after JetBlue announced a similar policy Monday,” Lori Aratani reports.
  • LA offers free testing for all residents, Mayor Eric Garcetti says: “By opening the city’s testing centers to the broader population, Garcetti said officials hope to stem the spread of the potentially deadly infection by identifying asymptomatic carriers while also gaining a better understanding of the virus’s impacts on the community,” Allyson Chiu reports.
Corporate impact: 
  • Boeing turns downs bailout funds: The company “has raised $25 billion in a massive debt sale, allowing it to avoid tapping a $17 billion bailout fund meant to shore up businesses critical to national security,” Aaron Gregg and Christian Davenport report. “The announcement came ahead of the Friday deadline to accept federal funding through the $2 trillion Cares Act … Turning down the funds means the company will not have to give the government an ownership stake, a requirement that executives had said they wouldn’t accept.”
  • Macy's plans to reopen all stores in six weeks: “Chief executive Jeff Gennette told investors on Thursday that 68 stores will be in the first wave, making it the first major retailer to announce its comeback plan. The move comes as Simon Property Group, the nation’s biggest mall owner, prepares to reopen 49 shopping centers this weekend in states easing restrictions, including Georgia and South Carolina,” Taylor Telford and Abha Bhattarai report.
  • Buffett expected to address the pandemic at weekend meeting: Berkshire Hathaway Inc’s annual meeting will be nothing like the extravaganzas of years past, but will give Warren Buffett a chance to show how resilient his cash-rich conglomerate may be … and the investment opportunities it offers,” Reuters's Jonathan Stempel reports.
  • Wells Fargo shifts energy bankers to bankruptcies: The bank "has revived its special group for bad energy loans in recent weeks as the bank braces for more pain from the sharp downturn in oil prices, people familiar with the matter told Reuters,” Imani Moise and David French report.
  • NBA owner believes season will eventually resume: “What’s clear is people want to see sports,” Milwaukee Bucks co-owner Mark Lasry said on CNBC. His comments "come shortly after CNBC reported that some team executives and agents are calling on the league to cancel the remainder of the season,” Kevin Stankiewicz reports.
Around the world:
  • Europe's economy had its sharpest decline on record: “The European economy shrank by 3.5 percent in the first quarter of the year,” Michael Birnbaum reports from Brussels. “France's economy contracted by 5.8 percent in the first quarter, the largest decline since record keeping began in 1949, the national statistics office said. Spain shrank by a historic 5.2 percent, far surpassing the previous record of 2.6 percent in 2009. And Italy — the European country hit hardest by the pandemic — shrank by 4.7 percent as it entered a recession.”
  • France will encourage biking post-covid: “Worried that people will start driving to work when restrictions are lifted, leading to a massive increase in air pollution, France’s environmental ministry on Wednesday announced a 20-million euro (roughly $22 million) plan to encourage cycling instead,” Antonia Farzan reports.
  • Malaysia will mostly reopen on Monday: “The move is only a first step. Schools and universities, as well as cinemas, nightclubs, and other businesses involving close contact, will remain closed, as will religious events and other large gatherings, Prime Minister Muhyiddin Yassin said,” Teo Armus reports.

Latest on the federal rescue

Former Trump officials lobbied for a Dallas hotel chain that received $126 million in PPP funds.

That's the most money so far that any public company received from the SBA: Dallas hotelier Monty Bennett’s companies “paid $50,000 to hire two well-connected allies of [Trump] for help seeking financial relief: Jeff Miller, former vice chairman of Trump’s inaugural committee, and Roy Bailey, a top fundraiser for the president’s reelection campaign, according to lobbying disclosures,” Michelle Ye Hee Lee, Tom Hamburger and Anu Narayanswamy report.

“As lobbyists blitz Washington for a piece of the massive federal response to the global pandemic, a group of former Trump administration officials and campaign alumni are in the center of the action, helping private interests tap into coveted financial and regulatory relief programs. In all, at least 25 former officials who once worked for the Trump administration, campaign or transition team are now registered as lobbyists for clients with coronavirus needs, according to The Washington Post’s analysis of federal lobbying records and employment data compiled by ProPublica.”

  • How things unfolded: A few weeks after Miller and Bailey came aboard, the companies together received the SBA windfall. “The companies said they needed the relief money to bring employees back to work and to help stabilize the hospitality industry.”

Two largest banks have processed $45.8 billion in loans: JPMorgan Chase & Co and Bank of America say “fewer than 30,000 loan applications in total from both banks have been approved by the SBA, the banks said just one day after the government temporarily shut the program to big banks in order to create ‘fair access’ for smaller lenders,” Reuters's Elizabeth Dilts Marshall and Michelle Price report.

“Bank of America, which submitted 250,000 applications totaling $28 billion, said its average loan size was around $100,000 and that three-quarters of applications came from businesses with fewer than 10 employees. JPMorgan, which submitted about 220,000 applications worth $17.8 billion, said its average loan size was around $81,000. Roughly half of the applications were filed by businesses with fewer than five employees, a bank spokeswoman said.”

Fed expands “Main Street” program: “The central bank said it would open its ‘Main Street Lending Facility’ to companies with up 15,000 employees and $5 billion in revenue compared to an initial program limited to those with 10,000 workers and $2.5 billion in revenue when it was announced on April 9,” Reuters's Howard Schneider and Lindsay Dunsmuir report.

“The size of the program will remain the same for now with $600 billion in loans available on the basis of $75 billion from Treasury at risk for any losses — an amount set by the Fed to insulate it from any loans that go bad. But the changes, the Fed said, aimed to capture what it saw as an important group of companies that are major employers but not large enough to access the public bond and capital markets used by the biggest firms. According to U.S. census data as of 2017 there were 2,364 companies with between 10,000 and 20,000 employees, including 436 management firms and 233 in professional and technical services.” 

  • More oil companies can get loans: “Larger, more heavily indebted companies can now qualify and use the money to pay off prior loans under the changes the central bank announced,” Bloomberg's Jennifer A Dlouhy, Ari Natter, and Saleha Mohsin report. “The move opens the door to more oil and gas producers, said Sen. Kevin Cramer (R-N.D.) who had pressed the administration on the issue as energy companies struggle to survive an epic collapse in fuel demand and crude prices.”

Bharat Ramamurti, who serves on the congressional oversight panel for the relief package, said the change raises questions:

Shelia Bair in the mix to lead oversight. Vice News reports the Republican former FDIC chair, who also backed the presidential bid of Sen. Elizabeth Warren (D-Mass.), is being considered to lead the five-member panel Ramamurti serves on. 

Money on the Hill

House Speaker Nancy Pelosi (D-Calif.) on April 30 said she wants the next coronavirus relief package to provide $1 trillion for aid to states and cities. (The Washington Post)
Pelosi says states and cities might need $1 trillion in next phase.

Trump says there's a “pause” right now: That's “a much larger figure than previously discussed that would represent an enormous federal commitment to bailing out hammered state and local budgets,” Erica Werner reports.

“Pelosi’s comments set up an intense clash with Senate Republicans as Congress begins to debate its next steps in responding to the pandemic. Senate Majority Leader Mitch McConnell (R-Ky.) has said repeatedly in recent days that he will not agree to additional spending for state and local governments unless Congress also passes liability protections for businesses and health-care workers — an idea Pelosi has rejected.”

  • Republicans rejected that number almost immediately: “That strikes me as a pretty outrageous number, just for state and local support. We’ve already provided $150 billion,” Sen. John Cornyn (R-Tex.) told reporters. But he said he would favor allowing states and local governments to have more flexibility in how they can spend the money, an issue he said he has been hearing about from constituents.

Trump has said suggested he won't approve funding without changes to local immigration laws: He also claimed to reporters that Republican-run states are doing better. “They want to help the states, they want to help bail outs, and bailouts are very tough. And they happen to be Democratic states. It's California, New York, Illinois, you start with those three,” the president said. “And the Republican states are in strong shape. You know, I don't know, is that luck or is that talent?"

Campaign 2020

Big donors are pressuring Biden not to tap Warren for VP.

The former vice president is trying to shore up progressive support: “Biden and his team, according to people familiar with the matter, have heard from many donors in the business community about who they think would be best to be chosen as his vice presidential nominee,” CNBC's Brian Schwartz reports.

“Those conversations have recently included attempts to push the campaign away from picking Warren and encouraging the choice of other candidates purportedly on his list, such as Sens. Kamala Harris and Amy Klobuchar, and Michigan Gov. Gretchen Whitmer. Many Biden contributors spoke on the condition of anonymity as these conversations, both with Biden and among his associates, were in private.”

Biden's campaign announced it has begun the vetting process: He “announced four co-chairs who will lead a committee to select his running mate …” Matt Viser reports. He said he hoped to have the vetting done by July.

Chart topper

Iconic brands at the biggest risk of disappearing: “More than 100,000 stores could disappear by the end of 2025, according to UBS. There already are signs of distress: Retail sales plummeted 8.7 percent in March, their worst drop on record, and analysts say conditions will only worsen in the coming months,” Daniela Santamariña, Abha Bhattarai and Kevin Uhrmacher report.

Daybook

Today:

  • The Institute for Supply Management’s manufacturing index for April
  • Chevron, Clorox, AbbVie, Honeywell,  Phillips 66 and DISH Network are among the notable companies reporting their earnings

Saturday:

  • Warren Buffet's Berkshire Hathaway holds its annual shareholders meeting and announces its Q1 earnings

The funnies

Bull session