On CNBC this morning Trump suggested that one strategy he'll use for reducing the national debt is having bond holders accept "haircuts". To be clear what that means, he'll try to get people who own US Treasury bonds and are owned X to accept X/2, or some reduced amount of what they are owed.Weirdly enough, I seem to recall Trump saying something like this way back last summer during the first GOP debate, though because no one paid attention to it at the time, I assumed I had misheard.
That's called defaulting on a debt obligation.
In other words, he wants to put the US through something like bankruptcy. Now, to be clear, in the world of business this is not at all uncommon. In a bankruptcy proceeding almost everyone takes a haircut. Many lose everything. You were owed $7 million and you have to accept $2 million. It often happens in simple business negotiations too. Things aren't going great. Debt has to be restructured to help the company survive. A creditor thinks they might lose everything so they'll accept 50 cents on the dollar.
So all good, except the United States is not a struggling casino. It's a sovereign nation with sovereign debt.
It is not too much to say that centuries of American prosperity have been undergirded by the "full faith and credit of the United States." In other words, the US always pays its debts in full and on time. Indeed, it's black letter text in the US constitution that the country's debt can never even be questioned. Defaulting on the national debt would clearly be unconstitutional.
That's the constitution part, which is a weighty matter. But the entire architecture of the global economy and the United States place in it rests on the certainty and basic risklessness of US government debt obligations. It's as simple as that. (This has actually allowed the US to in effect have people pay the Treasury to hold on to their money since 2008.) Introducing the idea that the US might pay back only a portion of the returns on Treasury bonds would basically disrupt the entire global economy, have massive and traumatic knock-on effects on the US economy and its ability to service its own debt. It would be catastrophic, an entirely self-inflicted wound.
Friday, May 6, 2016
Trump US national debt plan: default
Tiny fingered Trump seems to be tiny brained too, as Josh Marshall reports.