Donald Trump on Monday said it was “crazy” to think he would try to negotiate his way out of full repayment of government bonds — despite what he suggested last week — but he did suggest another potentially alarming option for debt management.
“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.
Last Thursday, Trump suggested on CNBC that he would be able to reduce the national debt by persuading creditors to accept a “haircut” on that debt, in which case creditors would be repaid less than the face value of US Treasury bills and bonds. For example, a Trump administration might repay $80 of a $100 bond to the bond’s holder.
“I’ve borrowed knowing that you can pay back with discounts,” he said. “I would borrow knowing that if the economy crashed, you could make a deal.”
Such a proposal, implying that the US would not fully pay back its debts, was immediately condemned in the finance world.
US government debt is widely viewed as one of the safest available investments. So the idea of investors’ receiving less than they were promised by the most powerful government in the world would almost certainly dramatically increase interest rates in the US and would very likely set off a global recession, experts said.
In a Monday interview on CNN’s “New Day,” as Trump attempted to clarify his plans for the national debt, he said the US would never default on its obligations because it printed money (emphasis added):
(Joe Raedle/Getty Images)
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 wanted 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.
Trump started out his answer by claiming that he never intended to offer creditors an actual haircut, but instead to have the government purchase a large amount of debt in the event of a crash in US debt prices. But whether that would work is questionable, as the government would need to somehow finance that debt purchase with other debt, as noted by The New York Times’ Binyamin Appelbaum.
But then Trump made an interesting point: One of the ways in which government debt is very different from privately held debt is that governments that control their own currencies, such as the US government and the US dollar, have the power to print money at will.
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.
In 2013, Neil Irwin laid out several problems with paying debt by printing money and causing inflation. In The Washington Post, he noted that the cost of social-insurance programs like Medicare and Social Security, the biggest projected drivers of future deficits, could not be inflated away (emphasis added):
But for each of those programs, inflation wouldn’t solve the government’s financial problems. It would make them worse (to put it in the technical language, they are real obligations, not nominal obligations). In other words, if the Fed becomes feckless and allows double-digit inflation to take root, the cost of medical care will rise by double-digits too (or even faster, if the pattern of recent decades holds up). Social Security payments are indexed to inflation; that policy could be changed, but any politician who tried to freeze Social Security (particularly at a time of high inflation) would surely find gray-haired armies of angry seniors in their office making their dissatisfaction known.
So Trump’s observation that it’s theoretically possible for the government to avoid default by printing money is technically true. But any actual implementation of that plan would likely be as big of a mess as his initial plan of offering an overt haircut to creditors.
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