Donald Trump has proposed that he will slash the $19 trillion national debt by persuading creditors to accept less than full payment.
Trump, the presumptive Republican nominee for president, recently told CNBC
he could use his business savvy to reduce America’s debt burden by pushing creditors to accept write-downs on their government holdings.
"I am the king of debt. I do love debt. I love debt and I love playing with it,” he told CNBC on Thursday. “But of course now you're talking about something that's very, very fragile, and it has to be handled very, very carefully," he said.
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,” the New York Times
However, rates are expected to continue rising over time.
“What do we do with all of the money that we owe everybody when rates go up and now all of a sudden we have to borrow at two points more. One point more even is devastating. But two, three, four, five points more. It's a real dilemma,” he told CNBC.
"I would borrow, knowing that if the economy crashed, you could make a deal," Trump said. "And if the economy was good, it was good. So therefore, you can't lose."
Bloomberg News noted that “since the founding of the country Treasury secretaries have been unwavering in their commitment to always make good on government obligations, an assurance that’s helped make U.S. debt a haven from risk around the world.”
A default would put that status in jeopardy, sinking the value of the dollar and sending yields surging, according to David Ader, head of government-bond strategy at CRT Capital Group LLC. Growth could stall as borrowing costs for holders of mortgages and other consumer loans -- which are tied to government debt yields, spiked.
“This is stupid and ridiculous and never going to happen,” Ader said from Stamford, Connecticut. “But it’s not impossible that he could be president, and could try all the seemingly ludicrous and impossible things he’s talked about. You can’t just dismiss it when the guys got his finger on the button, so to speak,” he told Bloomberg.
Experts also told the Times that Trump’s proposal was “fanciful,” saying there was no reason to think America’s creditors would accept anything less than 100 cents on the dollar, regardless of Trump’s deal-making prowess.
“No one on the other side would pick up the phone if the secretary of the U.S. Treasury tried to make that call,” said Lou Crandall, chief economist at Wrightson ICAP. “Why should they? They have a contract” requiring payment in full, he told the Times.
Many other Wall Street veterans doubted Trump would actually try to renegotiate U.S. debt.
"No chance," William Lee, head of North American economics at Citigroup, told CNBC
. "There's no chance unless he pulls a miracle. The miracle he would have to strike is for Congress to restructure entitlements and reform the tax system. That's the holy grail of fiscal reform and he — even the great negotiator — is unlikely to do that."
Many experts also explained that U.S. debt is held by many foreign governments and other entities, including U.S. pension funds.
"Imagine the most risk-free asset suddenly becoming not a risk-free asset. By the way, S&P and Moody's would have to downgrade it if you could renegotiate the value of the debt you hold or try to force it down. What are we, Argentina?" David Ader, chief Treasury strategist at CRT Capital, told CNBC.
Others have been even more harsh in their assessment of Trump’s plan.
Trump is a businessman, and in terms of thinking like a businessman his idea makes sense,” said Matthew Yglesias of Vox.
“This is how businesspeople think — especially those who work in capital-intensive industries like real estate. And for good reason. This is the right way to run a real estate company,” he said. Applying this idea to the United States would destroy the economy, Vox proclaimed.
“This is irresponsible talk,” Patrick Chovanec, New York-based chief strategist for Silvercrest Asset Management Group, told Bloomberg
. “If there was a belief that he would actually do it, I don’t know how markets would react. Clearly, they’re dismissing it at the moment as simply rhetoric, and not particularly well thought-out rhetoric.”
The U.S. has never defaulted on its obligations in modern history. Already, some on Trump’s team are walking back his statement.
“The government has to honor its debts,” Trump finance chairman Steven Mnuchin said Friday on CNBC.
Meanwhile, other prominent financial voices think Trump just may be onto something concerning his debt strategy, while not supporting the billionaire’s latest controversial proposal.
DoubleLine Capital’s Jeffrey Gundlach said Trump, if he’s elected president, would help the U.S. economy recover by going further into debt, just as Ronald Reagan fueled growth in the 1980s, Bloomberg
“Trump is going to win, and Trump is going to increase the deficit,” Gundlach said during a panel discussion Thursday in New York. Reagan “did it by taking three or four decades of stable nonfinancial debt-to-GDP ratio and putting it on a hockey stick higher.”
Under Reagan, the U.S. debt grew to more than $2.3 trillion at the end of 1988 from $807 billion eight years earlier, according to data compiled by Bloomberg. The total U.S. debt as of Dec. 31 was $15.1 trillion.
“What’s going to happen is you’re going to get a Reagan response with Donald Trump," Gundlach told the New York crowd. “He promises a wall, he promises to bring jobs back, and he promises a lot of infrastructure spending. Let’s face it: Trump is extremely comfortable with debt."
(Newsmax wire services contributed to this report).
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