Reminds me of something Mike Murphy said about Trump in the aftermath of Jeb’s collapse. The logic in favor of nominating another Bush was always, er, complicated, but the logic against nominating a loose cannon is straightforward.
“Then the problem becomes how are we the world’s reserve currency anymore? We get away with a lot of shit because people think we have a stable system. But if your banker comes in one day wearing a diaper, speaking gibberish, you’re going to pull your money out of that checking account. So that has a huge potential impact on our ability to protect our economic strength. We borrow a lot of f — ing money. Because people think the number one safest instrument in the world is the U.S. Treasury bond. And if we start making reality-show clowns in charge? Run on the American bank. You think the pissed-off steelworker in Akron has trouble now? Wait until we have a financial collapse and they take 25 percent off the dollar. He’ll be serving hot dogs in an American restaurant in China.”
I’ll bet even Murphy didn’t think Trump would advertise the possibility that America’s creditors might not receive payment in full in a Trump administration. Choose your own preferred term for what he’s recommending here — renegotiation, bankruptcy, default.
Asked 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.”…
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…
Repurchasing debt is a fairly common tactic in the corporate world, but it only works if the debt is trading at a discount. If creditors think they are going to get 80 cents for every dollar they are owed, they may be overjoyed to get 90 cents. Mr. Trump’s companies had sometimes been able to retire debt at a discount because creditors feared they might default.
But Mr. Trump’s statement might show the limits of translating his business acumen into the world of government finance. The United States simply cannot pursue a similar strategy. The government runs an annual deficit, so it must borrow to retire existing debt. Any measures that would reduce the value of the existing debt, making it cheaper to repurchase, would increase the cost of issuing new debt. Such a threat also could undermine the stability of global financial markets.
You can game this out yourself. The U.S. gets away with offering low interest rates on its debt only because creditors believe repayment is certain. What happens to demand for treasuries if that certainty evaporates? Some creditors might be willing to take a chance on new, riskier U.S. treasuries — in return for a higher interest rate, of course. Others would flee the market. Suddenly we’d have steeper interest payments to make on new debt and fewer entities willing to lend us money to make those payments. It’d be the junk-bond-ification of U.S. government securities. What sorts of social and political consequences would flow, do you imagine, from the government suddenly running out of money to cover its multitude of obligations? Here’s a hint: You know how Trump likes to say that he’ll protect entitlements? Let’s see what he says about that after he’s turned America’s credit rating into garbage. A Twitter buddy suggested a new slogan for his campaign in light of this story: “Make America Greece Again.”
His comments are actually a perfect illustration of the fiscal divide between the two most prominent Republicans in the country now, Ryan and Trump. Ryan’s spent years agonizing over ways to gradually reduce entitlement spending precisely so that the country won’t have to go through what Trump’s imagining here, in which the feds’ creditworthiness begins to crumble due to spiralling interest payments, easy money from creditors dries up, and the lights start going out. That Trump would float this as something worth considering absent some dire emergency means, as the Times delicately puts it, either that his knowledge of casino financing doesn’t quite “translate” to managing sovereign debt or, as Josh Barro puts it, that Trump believes the “usual concerns about prudence and risk can be thrown out the window because the country is already a smoldering garbage fire.” The only way to put out the fire and return to “greatness” is to … start defaulting, I guess?
Here’s Reince Priebus assuring an audience this morning that Trump is trying his best, which might actually be true, lord help us. Exit question via Jim Geraghty: Are we sure his nomination is assured? A few more public brain farts along the lines of national default and maybe the delegates in Cleveland will simply decide “nope.”
— CSPAN (@cspan) May 6, 2016