From the lips of the presumptive Republican nominee for President ....
Over the weekend, Donald Trump said perhaps one of the stupidest things ever uttered by a major party nominee for President of the United States:
[T]he presumptive Republican nominee, Donald J. Trump, suggested that he might reduce the national debt by persuading creditors to accept something less than full payment.
Asked on Thursday whether the United States needed to pay its debts in full, or whether he could negotiate a partial repayment, Mr. Trump told the cable network CNBC, "I would borrow, knowing that if the economy crashed, you could make a deal."
He added, "And if the economy was good, it was good. So, therefore, you can't lose."
Such remarks by a major presidential candidate have no modern precedent. The United States government is able to borrow money at very low interest rates because Treasury securities are regarded as a safe investment, and any cracks in investor confidence have a long history of costing American taxpayers a lot of money....
... Pressed to elaborate on his remarks, Mr. Trump did appear to step back. He said that he was not suggesting a default, but instead that the government could seek to repurchase debt for less than the face value of the securities. The government, in other words, would seek to repay less money than it borrowed. ...
For someone whose main alleged qualification for the office is "making deals", talking down the Nation's creditworthiness, and thus talking up the interest rate, is insanity.
Yup, it's empty.
As opposed to most of Trump's ridiculous statements, though, this one can actually matter. Let's say Trump gains on Hillary in the polls -- mightn't this add some downward pressure on bond prices and drive up interest rates up for new Treasuries? IOW, this could actually affect debt service costs even if he is not elected. Sure, he'll talk it back - but the message has been sent that banana republic haircut-financing is in the mind of a potential president, and it will be noticed.
Worse yet, I am having trouble why Trump would say such a thing, even if he did believe it? How does this benefit his campaign in any way, and how would it draw additional voters his direction? Does he think some voters are so stupid that this will impress them? Or is screwing creditors just how he does business?
I can't imagine even a Democrat saying such a thing.
More here. And here.
For someone whose main alleged qualification for the office is "making deals"
ReplyDeleteYup, he's quite the successful businessman.
I've worked as a subcontractor on one of his projects and his organization is willing to pay twice the going rate for design services without batting an eyelash. Just the kind of thinking that's bound to reduce the deficit.
-Anonymous Maximus
Hope you got paid ...
DeleteSign me up! Lol!!
DeleteAnd no, that's not an endorsement for Trump. But seeing how underpaid freelancers in my industry are these days, overpaying sounds pretty darned good.
So if a bond has a face value of and was originally sold at $1000, it's trading for $900 on the open market because interest rates went up, and Trump offers to buy it back at $950, that's a bad deal for whom?
ReplyDeleteAnd what is he going to buy it back with? Only answer I see is with $950 worth of new debt.
DeleteBut that's not what he's talking about, is it? He's talking about reducing the total national debt, which can only mean that the bondholders take a haircut.
Seems to me the touchstone is: what are the rational expectations of bondholders of an economy 19 trillion dollars in debt, particularly since bonds have been a death trap for well over a year now? Blue skies forever? A haircut of unknown timing, provenance and size anyway? Total economic collapse and swan-diving from high rises?
ReplyDeleteSure, this is Trump floating one of his signature brain farts, like them or not, but it sounds to me as if he's trying to thread the needle with the reformacons who want to reduce the entitlement burden as well as those who find the alternative - $19T extracted from somewhere - far more likely to come out of their own pockets than from real GDP growth.
When the only good answers to a problem are completely delusional, how does one rate the remaining bad answers?
Keith, I give you credit for giving Trump's idea the most positive reading (far beyond anything in Trump's head, I'm sure). The Trumpians (which I know you are not) have pretty much ignored this brainfart -- at least you're giving it a try.
DeleteBut I think you're trying to square the circle. Are you saying that this idea is already priced in? I serious doubt that. Nor do I see how either the reformacons or the spenders would be tempted by this, or any other way that this is a genius idea for bring the two sides together. Rather, the argument has been, is, and will continue to be all about taxes vs. spending.
To me, if Trump's idea has any effect, it will be to raise interest rates on new debt, making the debt service problem even worse.
There's also the constitutional problem (I know, this is Trump we're talking about):
DeleteThe validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned...
14th Amendment, Section 4.