Self-Proclaimed “King Of Debt” Floats Partial Default, Hyperinflated Currency As Solutions To Debt Reduction

Trump Suggested A “Swashbuckling” Approach To Renegotiating U.S. Debt. During part of an hour-long CNBC interview ostensibly focused on the Federal Reserve’s domestic monetary policy decisions, Donald Trump hyped concerns of runaway interest rate inflation for trillions of dollars of outstanding U.S. Treasury bonds while declaring himself “the king of debt.” Trump suggested that the “swashbuckling” approach he had used to renegotiate private debt deals could be employed to “refinance debt” owed by the United States Treasury. Trump’s proposal drew intense media scrutiny; Josh Barro of Business Insider stated that it is “an insane idea that would tank the American economy,” and bond experts told Bloomberg that Trump’s idea was “stupid and ridiculous.” [Media Matters, 5/8/16]

After Claiming To “Understand Debt Better Than Probably Anybody,” Trump Suggested “Printing[ing] The Money” To Pay Down National Debt. Trump told CNN’s Chris Cuomo that The New York Times and other publications had misrepresented his previous hint at defaulting on the national debt. Trump claimed he never said he would default on debt because, “I hate to tell you,” but the U.S. would “never” default on its debts because the government can “print the money” it needs to cover obligations. From the May 9 edition of CNN’s New Day (emphasis added):

DONALD TRUMP: One other thing that was really misrepresented. I’ll tell you this was misrepresented -- and that’s the buyback of debt. I said if we can buy back government debt at a discount, in other words if interest rates go up and we can buy bonds back at a discount, if we are liquid enough as a country, we should do that. In other words, we can buy back debt at a discount. People said I want to go and buy debt, and default on debt. These people are crazy, 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 never is a default. But, the point is it was reported in The New York Times incorrectly.

CHRIS CUOMO (HOST): You said you would go to creditors and make them take less.

TRUMP: It was reported in the failing New York Times, and other places, that I want to default on debt. You know I'm the king of debt, I understand debt better than probably anybody. I know how to deal with debt very well. I love debt. But, debt is tricky and it’s dangerous. You have to be careful and you have to know what you’re doing. But let me just tell you, if there is a chance to buy back debt at a discount, U.S. debt -- in other words interest rates go up, and the bonds go down, and you can buy debt, that's what I am talking about. People had it, the Times and others wrote, “Oh Trump wants to go and see creditors and buy debt at a discount.” Now, there could even be a time when somebody comes in -- but with the government they are never going to walk in and say, “Do me a favor, will you buy my debt at a discount?” In business that happens all the time.[[,]] I bought mortgages back when the market went bad I bought mortgages at tremendous discounts. And I love doing that, there is nothing like it. Actually, it gives me a great thrill. But, in the United States with bonds, that won’t happen because, in theory, the market doesn’t go down so you default on debt. [CNN, New Day, 5/9/16]

Trump’s Latest Statements Alarm Media, And Experts Warn Of Economic Disaster

CNN: Experts Say Printing Money To Buy Back Debt Would Be “Disastrous For The Economy.” CNN’s chief business correspondent, Christine Romans, lambasted Trump’s ideas about the federal debt on the May 10 editions of CNN’s Early Start and New Day, describing his proposal to renegotiate outstanding federal debt as “alarming.” Romans reported that experts say “Trump doesn't have a coherent idea of what he’s talking about” and that printing money to pay debts would be “disastrous for the economy.” [Media Matters, 5/10/16]

MSNBC: “Trumponomics” Is “Playing With Fire.” Bloomberg Politics editors Mark Halperin and John Heilemann attempted to outline Trump’s shifting positions on tax policy, the minimum wage, and the national debt during a segment emblazoned with the on-screen headline “Trumponomics.” Heilemann asked if Trump “is playing with fire on economic and business-related issues,” and Halperin said yes, adding that Trump is “alienating people on the right and left” and “alienating people in the business community” due to his statements on the economy. [MSNBC, With All Due Respect, 5/9/16]

CNN: Trump’s Money-Printing Solution Would End Independence Of The Federal Reserve, Removing “The Foundation Of Our Economic Success.” During an interview with CNN, conservative economist Douglas Holtz-Eakin, former director of the Congressional Budget Office (CBO), warned that if Trump, as president, ordered the Federal Reserve to print money to buy debt, it would “break the independance of the Fed” and undermine a Federal Reserve System that “has been the foundation of our economic success.” After host Jake Tapper noted that Trump supporters have attempted to push back on fears of Trump’s “print the money” solution, Holtz-Eakin assured him that printing money to buy back federal debt would certainly lead to high rates of inflation. [CNN, The Lead, 5/9/10]

Business Insider: “Another Potentially Alarming Option For Debt Management.” Business Insider criticized Trump’s comment that he could pay for the federal debt by printing money, saying the statement is “technically true,” but the resulting inflation would be “as big of a mess as his initial plan of offering an overt haircut to creditors.” From the May 9 edition of Business Insider:

“First of all, you never have to default because you print the money,” the presumptive Republican presidential nominee said on CNN.

This is true, but as with trying to get bondholders to take a haircut, it's out of the economic mainstream.

The Federal Reserve, through its open-market operations of buying and selling US Treasury debt, has the ability to increase the overall monetary base — it can print money. Indeed, through programs like quantitative easing, it has done so somewhat extensively during the past several years.

Printing money to relieve the national debt, however, would probably be disastrous. It would most likely precipitate a huge amount of inflation, causing prices to rise very quickly and wreaking havoc on the economy. [Business Insider, 5/9/16]

Slate: “Donald Trump Is Still Lost In A Forest Of Nonsense” On Debt Policies. Slate senior business correspondent Jordan Weissmann reported that “Trump is right” when he says the United States can print money to buy debt, but he cautioned readers not to “pay too much attention to the trees” because Trump “is still lost in a forest of nonsense” on real-world policy implications. He called Trump’s initial proposal to buy back U.S. debt at a discount “crazy talk” and noted that printing money to buy U.S. debt would avoid a technical default, but the “severe inflation” it would induce “can be the equivalent of a default.” From the May 9 edition of Slate:

Trump is right. When a country prints its own currency, markets don't typically worry about them running out of money, and thus are willing to lend freely. That allows nations like the U.S. to issue new debt in order to cover their old obligations. This is why comparisons between the U.S. and Greece are inherently ridiculous. Greece uses the euro, which it does not control, and therefore only has a finite sum of money at its disposal to make good on what it owes. Its coffers can run dry. The U.S., on the other hand, has infinite dollars.

There is a catch, of course. At some point, if the U.S. borrows and spends enough, that could lead to a major bout of inflation. For creditors, severe inflation can be the equivalent of a default, since the value of their bonds drop. As a rule, markets seemingly worry less about that possibility than they do about outright nonpayment. But in the far-off nightmare scenario wherein the U.S. suddenly turns into a full-on Venezuela- or Zimbabwe-style basket case, that might keep us out of the debt markets, in which case we'd have to pray for the benevolent folks at that the Federal Reserve to co-operate either by buying Treasurys or letting the government overdraw its account. But again, that's all deep down this rabbit hole. [Slate, 5/9/16]