Monday, May 16, 2016

Dean Baker — What Can Donald Trump Teach Us About the National Debt?

Trump first raised the debt issue a couple of weeks ago when he implied that as president he would negotiate discounts on US debt just like he did with many of his businesses that faced bankruptcy. In those cases, Trump could tell his creditors that if they didn't make concessions, like accepting 50 cents on each dollar of debt, then he would go into bankruptcy. If a Trump business went into bankruptcy, the creditors might have to wait years to get anything and may end up with much less than the discount Trump proposed.
That might work for a business, but it doesn't make sense for a government like the United States, which has a perfect credit history and borrows in a currency it prints.
Trump later made exactly this point. Of course since the US government prints dollars, it is hard to see what it could mean for the country to go bankrupt, unless we forget how to use the printing presses?
But there is still a story about discounted debt that does make sense to which Trump referred -- if interest rates rise, the market value of long-term bonds falls. If we issued a 30-year bond in 2016 at 2.6 percent interest (roughly the current rate) and the interest rate in 2017 rose to 6-7 percent (the 1990s interest rates), then the market value of the bond will fall by around 30 percent.…
What Can Donald Trump Teach Us About the National Debt?
Dean Baker

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