Tuesday, May 10, 2016

The Trump Debt Repudiation Walk-Back Is Actually Funnier Than His First Insane Idea

by Neil H. Buchanan

Last week, Donald Trump offered some casual comments about the federal debt that amounted to an announcement that he would simply repudiate all or part of the federal debt.  The King of Bankruptcy announced that, as President, he would tell the government's creditors to accept pennies on the dollar, just like those chumps who loaned money to Trump's failed businesses over the years.  One of the most respected business/economics reporters for The New York Times wrote an article last week describing Trump's shockingly uninformed comments, and all hell broke loose among those who know even a tiny bit about the federal debt.

Now, some people might imagine that Trump would live up to his false tough-guy image and refuse to admit error.  In fact, however, that has never been Trump's modus operandi.  Even on his most famously bull-headed comments, he has actually been quite squishy.  His comments about criminally prosecuting women who seek abortions were quickly followed by a bizarre series of shifting positions.  I still cannot figure out where he landed on imposing 45% tariffs on Chinese goods.  And even after the infamous "John McCain is not a hero" kerfuffle, Trump tried to have it both ways by claiming that he had said that McCain is a hero.  (In fact, Trump said "He's a hero" mockingly, in response to his interviewer's assertions.)

It was not at all surprising, therefore, that Trump soon claimed that he never said what he said about repudiating government debt, and it was certainly predictable that he would blame it all on the press.  His angry denial to CNN's Chris Cuomo is quoted at length in this TPM article: http://talkingpointsmemo.com/livewire/donald-trump-debt-idea-explained.  I encourage everyone to read that short report before continuing with this column, but even if you do not, this story is not at all difficult to follow.

Three things jumped out at me from Trump's amusing verbal gymnastics, the third of which is the most important:

(1) Trump is simply incapable of responding to criticism without personally attacking the people and organizations that have criticized him.  In this case, he described the news report as coming from "the failing New York Times."  Leave aside the absurd notion that The Times is failing, which is obviously false.  Trump simply cannot respond to criticism on the merits.

In fact, he cannot even respond to criticism without focusing on the least important, silly issue that he can find.  For example, two days ago Trump engaged in a widely reported "Twitter war" with Senator Elizabeth Warren.  There were something like a dozen tweets on each side, yet Trump never managed to engage with Warren on a single issue, instead deriding her as "goofy" and trying to insult his way out of the fight.  Most interestingly, every one of his responses made some mention of Warren's claim to be partly of American Indian heritage, which is not merely eye-rollingly juvenile but also old news.  (I do have to give partial credit to one of Trump's surrogates, however, for coming up with the name "Fauxcahontas."  Within an incredibly stupid non-debate, that was fun word play.)

Trump, in any case, has exactly one move: Hit back at his critics, but do so in the most irrelevant, childish way possible.  The New York Times reports something that you said that you now wish you had never said?  Don't just clarify or honestly disavow your earlier argument.  Call them losers!  As Trump himself might tweet: Pathetic.

(2) Part of Trump's defense of his remarks about repudiating the federal debt was actually important and sensible.  But because Trump is such a buffoon, his association with that important point is bad news.  Specifically, he bellowed: "This is the United States government. First of all, you never have to default because you print the money, I hate to tell you, OK? So there is never a default."

He is not wrong.  Which is to say that he is right.  Even though Trump -- and plenty of others -- continue to liken the U.S. to Greece to scare people into thinking that debt is always horrible, the key difference between the two countries is that the U.S. issues debt in its own currency, but Greece does not.  Countries that issue debt in their own currencies cannot simply inflate the debt into irrelevance without consequence, of course, because creditors in the future will certainly impose extra costs for borrowing.

Yet it is certainly true that the U.S. cannot default on its debt so long as the debt is denominated in dollars.  (Caveat: The Republicans who threaten not to increase the debt ceiling as necessary to accommodate federal borrowing requirements claim that the president would be forced to default on government obligations.  They are wrong, but that is another story that could fill an entire book.)  When Trump says cavalierly that "you print the money," however, it makes that basic truth sound like some kind of dirty secret rather than a simple fact of public finance.

(3) In any case, we do need to ask whether Trump's new position makes any sense at all.  Of course, we know that this new position might not last more than a few hours, but given that he has made a point of saying, "That's not what I meant, here's what I really meant," it might be worth thinking a bit about what he claims to be his clarified position.

And that new, clearer position is actually laugh-out-loud funny.  Trump's attempt to use his false sense of business savvy to bail himself out of his latest mess simply ties him in knots, because he thinks that the federal government can do what businesses can do.  It cannot, and it should not.

Here is Trump's new position: "So here’s the story, just to have it corrected. If we have an opportunity where interest rates go up and you can buy debt back at a discount, I always like to be able to do that, if you can do it."  This, he says, is in contrast to the idea that "I am going to renegotiate and restructure debt, [which is] ridiculous and they know it's ridiculous."

Imagine that you are running a business.  It does not even need to be a business that serially fails to pay its creditors or tries to strong-arm ex post renegotiations of the business's agreements, as Trump's businesses do.  Your well-run business has borrowed a total of $1 billion at 2% interest, to finance various projects.  The business holds valuable assets, including cash on hand and a number of pieces of property.  You could, in fact, have paid for the $1 billion in projects without borrowing, but at 2% rates, borrowing was just too good a deal to pass up.

Now, interest rates rise to 4%.  The people who loaned your business money at 2% surely would love to be able to cancel those loans and re-lend the same money at higher rates.  They cannot force your business to repay early, however, so they suggest that you pay them off voluntarily at a discount.  Depending on the other terms of your loan, and the other loans that your creditors might be able to make, they could find it worthwhile to allow your business to pay off its debts for, say, $750 million.  You are happy, because your net worth just went up by $250 million, and your creditors are happy because they can now take the $750 million and make new, more profitable loans.

Later, you are running for President, and you think, "Well, I've bought into this nonsense about the federal debt being bad, bad, bad.  What can I do?  Why not say that I'll buy back debt at a discount, like I did with my business?"  What could be more obvious than to pay back debt early, if the creditors are willing to accept less than they loaned -- and there is no repudiation required, because it is all voluntary?

But what is the federal government going to use to pay off the debt early?  Issuing new debt does not make sense, of course, because interest rates have risen, and except under unusual circumstances, you would be crazy to extinguish 2% interest-bearing Treasury securities by issuing new 4% interest-bearing securities.  (Note: There are important technical details that determine how best to balance various aspects of debt, including interest rates, maturities, and so on.  But the Treasury Department already monitors those issues, constantly looking for ways to improve the country's financial position.  Nothing that Trump claims to know is news to those economists.)

Still, you think back to your days as a vaunted business genius, and you think that the smart thing is to buy back those loans.  But with what?  Cash on hand?  None available here, because if it were, it would have made sense to borrow less in the first place.  ("Debt is bad!!"  Remember?)  The only alternative is to sell assets to raise cash to buy back the bonds.  In a business context, that often makes sense.  For example, a business might decide that it is worth parting with a subsidiary for $750 million, in order to save $250 million on the bottom line.  Businesses necessarily make decisions every day about which assets are worth holding.

For the federal government, however, the biggest assets are the ability to print money (see above) and the ability to collect taxes from a healthy economy.  You cannot sell those assets, so what is left?  Why, federal assets like land and government buildings, of course!  But Trump has already floated that trial balloon, and no one was impressed.  (And why not sell naming rights to the White House and the Washington Monument?  Why not sell Trump Champagne in the foyer of the Supreme Court?)

As I noted in a Dorf on Law post last month, Trump supporter Ben Carson recently came to the defense of genocidal maniac Andrew Jackson for paying down the national debt in the 1830's.  Jackson's supposed accomplishment, however, was the result of liquidating a particularly valuable national asset called the Second Bank of the United States, the absence of which led to an immediate economic collapse.

So, yes, Donald Trump can say that his plan to pay down the debt for pennies on the dollar could be achieved without repudiating the debt.  The alternative, however, requires the government to sell off assets in order to reduce the debt, and only after interest rates rise.  The net result, at best, would be to leave the government's net worth unchanged.  At worst, it would involve selling off national assets at fire-sale prices and pretending that the reduction in debt had somehow made the country better off.

I am betting that a President Trump would be more than willing to go for the showy asset sales to make the debt go down, no matter how truly stupid it would be to do so.  After all, his claims to being a smart businessman have turned out over and over again to be hot air.


Unknown said...

As brilliant as You are, Professor, please don't ever use those two words in that last paragraph together ever again.

Joe said...

"federal assets like land"

come on ... can't we at least sell one of the lesser states? Puerto Rico can fill in.

Shag from Brookline said...

As to Unknown's unknown (except to himself) two words together admonition, there are several possibilities. My guesses: "President Trump" or "smart businessman." (I'm reminded of Sec'y. Rumsfeld's unknown unknowns.)

Shag from Brookline said...

Joe's comment on Puerto Rico is a reminder of what Obama said at the WHCD on Trump's business "successes" with waterfront properties.