This is a guy, remember, who’s vowed to protect entitlements notwithstanding the dire risk that ballooning Medicare costs pose to the country’s creditworthiness. Presumably this is his fallback plan if/when America’s debt servicing grows so large that we simply can’t borrow enough to cover it anymore. I say, why wait until the crisis hits? Let’s print $19 trillion and pay off the whole thing now.
His point here to CNN is that his comments last week about the national debt were misunderstood. He wasn’t suggesting he’d stiff America’s creditors by offering partial repayment, he claims. He was suggesting buying back some of the country’s debt at a discount once interest rates rise and older treasuries with a lower yield lose value. Just one question: Where are we getting the cash to fund those repurchases? Trump nods at that problem here by noting that we could do it only “if we are liquid enough as a country,” but that’s the refinance equivalent of “Assume a can opener.” How will we be liquid enough? Buying back old bonds at a discount gets you nowhere if you need to borrow at those new higher interest rates to fund the purchases. It makes sense only if you’re running a budget surplus and have cash already on hand. Are we going to … print that cash? Because, given his economic plans — hands off entitlements, tax cuts for the rich (which are, however, newly negotiable), new infrastructure spending, and a short-term shock to the economy if he follows through on mass deportation — a budget surplus seems highly unlikely. President Trump would be many things but a deficit hawk is not one of them:
If the government issues debt during a low-rate period, that’s good news. To refinance that debt in a period of higher bond yields, the government would have to borrow from the market at much higher rates. (Unless that is, the government was running a budget surplus and could use cash to repay the debt. But that hardly seems likely given his spending and tax plans.)
Currently, most of the US’s longer-term debt trades above par value because it was issued at a time when bond yields were higher. For example there is a bond with a 2030 maturity and a 6.25% coupon; it trades at 152 cents on the dollar. Would it be worth offering 155 cents on the dollar upfront, and refinancing the debt at today’s lower rates? The dollar value of US debt would rise, not fall, in such circumstances.
In short, any voluntary deal with the market would require the government to pay fair value. And unless you think the Treasury bond market is mispriced (and it is the most liquid market on the planet), the government is unlikely to profit.
The answer to all this, as is always the case with Trump, I guess is “Trust me.” He’s the Green Lantern, right? He promised to bring the jobs back; he’s going to create great, big, beautiful growth, so much growth that you’ll get tired of making money, that I can tell you. Revenues will soar so high, we’ll have money for Medicare and infrastructure and a hugely expensive comprehensive removal program for illegals and debt buyback. Through Trump all things are possible.