Donald Trump

We Were Kidding About Donald Trump Literally Taking the U.S. to Bankruptcy Court, Right?

GOP presumptive nominee discusses renegotiating federal debt, like struggling economies do.

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Trump
Credit: Gage Skidmore / Flickr

Most of us look at Puerto Rico's financial situation—out-of-control debt it can no longer pay off—and see it as a dire warning. It's possible that GOP presumptive presidential nominee Donald Trump doesn't see it that way.

That is to say, Trump's latest proposed economic solution for federal debt is to do what Puerto Rico is likely going to have to do try to remain solvent—ask creditors to take a haircut on outstanding debts. Such is the way of the world for struggling businesses and dysfunctional economies like Greece. The idea that America itself might pursue such a strategy is a novel suggestion, to say the least. Trump's musing that America might skate to the brink of default for the sake of a deal seems to have prompted a parade of spit takes from economic analysts. Josh Marshall went on a tear at Talking Points Memo:

It's a sovereign nation with sovereign debt. It is not too much to say that centuries of American prosperity have been undergirded by the "full faith and credit of the United States." In other words, the US always pays its debts in full and on time. Indeed, it's black letter text in the US constitution that the country's debt can never even be questioned. Defaulting on the national debt would clearly be unconstitutional.

That's the constitution part, which is a weighty matter. But the entire architecture of the global economy and the United States place in it rests on the certainty and basic risklessness of US government debt obligations. It's as simple as that. (This has actually allowed the US to in effect have people pay the Treasury to hold on to their money since 2008.) Introducing the idea that the US might pay back only a portion of the returns on Treasury bonds would basically disrupt the entire global economy, have massive and traumatic knock-on effects on the US economy and its ability to service its own debt. It would be catastrophic, an entirely self-inflicted wound.

Trump seems to have immediately backpedaled on the idea a bit and switched to suggesting that the U.S. could seek to repurchase its own debt on better terms, again something that's not uncommon in the corporate world. But there's a slight problem with trying to translate it to the United States: The government operates at a deficit and his solution would result in having to borrow even more money in order to pursue such a plan.

Trump's perception of how debt works ("I am the king of debt. I do love debt. I love debt. I love playing with it," he said) could help explain why thinks he can promote fiscally incoherent polices that call for both tax cuts and military spending increases (while maintaining Social Security). Trump believes that everything is up for negotiation—everything has the potential for a deal. This is not a bad trait for either a businessman or a politician, but it can reach a point where it becomes a default response when unable to actually explain how he's going to get from Point A to Point B in policies. For Trump, making a "deal" is his variation of candidates like Bernie Sanders who want to paper over fiscal gaps in policy plans with promises to make rich people and corporations pay for it.

I'll let The Economist get the final punchline on the problem with trying to force any sort of debt renegotiations:

A forced deal, of course, would count as a default. Treasury bonds are at the heart of the financial system. Banks use them as collateral for loans; insurance companies hold them as reserves; pension funds own then to fund retirement benefits; mutual funds own them as well. Any default within the system would have cataclysmic consequences for the economy that would far outweigh any gains in refinancing costs. To cap it all, the Federal Reserve owns almost $2.5 trillion of Treasury bonds and the Social Security Fund some $2.8 trillion. So the government would, in part, be defaulting to itself.

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59 responses to “We Were Kidding About Donald Trump Literally Taking the U.S. to Bankruptcy Court, Right?

  1. If this was 5 years ago I might have actually said something equally as stupid.

  2. Trump believes that everything is up for negotiation…

    Let’s see how President Trump negotiates with reality.

    1. The man’s a sociopath; reality is whatever gibberish he is currently spewing from his mouth.

    2. Is that better or worse than a president who thinks nothing is up for negotiation?

  3. Trump seems to have immediately backpedaled

    Trump?

    Really?

  4. Indeed, it’s black letter text in the US constitution that the country’s debt can never even be questioned.

    “It’s *not* being questioned. We know it’s a *fact*.”

    1. *** backpedals on tag usage ***

    2. Trump is not going to question the debt. He is going to deny its existence.

  5. Only by defaulting on its debts can America be great again.

    1. Art of the Deal, baby!!

  6. I could be talked into allowing nations/states to declare bankruptcy under the following condition:

    All assets of every politician, to ever hold legislative or executive office since the state was projected to go in the red, be immediately seized and applied to service the debt first.

    1. In reality, the federal government does not need to declare anything. All they have to do is stop honoring any bonds they don’t feel like paying.

      Good luck with your new law treating politicians like contracting officers. Keep us posted on the progress.

  7. Well, figure that dirt is dirt, sin is sin and Trump is what he is…

  8. “I am the king of debt. I do love debt. I love debt. I love playing with it,” he said

    He loves debt the same way some of our favorite commenters love their own feces.

    1. He said that in the context of encouraging PR to default/renegotiate its debt. While recognizing that doing so would mean PR wouldn’t be able to borrow squat going forward, and would have to downsize its public sector.

      1. People keep lending to Argentina. And Philadelphia. Puerto Rico will have little problem as long as investors are stretching for yield.

        1. Don’t forget Greece and General Motors!

    2. And to think Charles Ponzi only took on $20 million worth of debt and he got a whole financing stratagem named after him!

      But seriously – Trump’s whole deal there with the “well, what you do is take on a bunch of debt knowing you can re-negotiate it later, if the deal works out bad the banks know they have to take a haircut if they want any money and if the deal turns out good, well, you’ve made a bunch of money so what do you care if you actually have to pay what you agreed to pay.” Why the hell would anybody ever sign a deal with this guy knowing right up front that he doesn’t consider a signed contract – what he agreed to pay – to be the end of the negotiations but just a starting point? I wouldn’t sell somebody like that a pencil stub for a quarter without having the coin checked out first.

      1. well apparently plenty of people have and everyone is richer for it. What have you done?

      2. As long as the first debt he doesn’t honor is Social Security, I’m okay with his plan.

  9. Can we find someone to buy Puerto Rico for about 20 trillion?

  10. He really said that? The foundation of the world financial economy? The easiest borrowing at the lowest rates in the world? Default?

    That’s actually pretty funny.

  11. Treasury bonds are at the heart of the financial system. Banks use them as collateral for loans; insurance companies hold them as reserves; pension funds own then to fund retirement benefits; mutual funds own them as well.

    Market failurz!

  12. Governments prefer to default on their debt slowly through inflation. That’s why you see central banks aiming for 2% inflation. You could say he’s just being more honest and open about it. But since the US dollar is the reserve currency of the world the US has to keep printing more money and running up the debt or the world economy crashes. With $18 trillion in debt there’s not much the federal reserve can do except keep rolling over the debt at a low interest rate. Thanks to the federal reserve there is no free market when it comes to money.

    1. This article is Salon-level derp.

      The current policy of low interest rates is actually killing pensions and insurance companies. But somehow the people currently in office enacting these policies are not the dangerous ones. Apparently these “massive and traumatic knock-on effects” are nothing to worry about, but undoing the damage IS dangerous.

      1. Bingo. It is low rates – created by the flood of easy money from central banks everywhere – that drives investors to pour money excessively into risky but higher yielding debt like Argentina, Philadelphia, and Puerto Rico. This will be a real party when it comes crashing down.

    2. Inflation is repudiation.

      – Calvin Coolidge.

      He said it when he was VP, and it is still true.

      Kevin R

  13. I’m glad at least he broached the subject and people are talking about the implications – even if to decide it’s a bad idea. (And if you are certain it’s a bad idea then tell us why people continue to re-finance Greece even after 2 debt restructures.)

    1. The United States can excise from itself a GDP the size of Greece’s this year and its economy would still be expanding.

    2. People continue to re-finance Greece so that they can pretend the Greek bonds are still asssets on their balance sheets. You stop re-financing the Greek debt then you have to admit that those billions of dollars of “assets” you’re holding in the form of Greek bonds aren’t really worth anything at all.

      It was the same thing with the banks when the market and the economy collapsed and so many people could no longer make their house payments. The banks had to stop foreclosing on all of them because to do so they’d have to admit that the mortgage paper they held was totally worthless. If the guy was only behind 4, 5, 6 months on his payments, why, that was just a “non-performing loan” and they could pretend they were only down the amount of the missed payments, not down the entire amount of the mortgage loan. We’re sure that guy’s totally going to start making his mortgage payments again any day now, this paper’s still worth a lot of money. No, the guy is not ever going to start making the note again, that paper is worth exactly nothing.

      And hey, if the Confederacy ever comes back I’m going to be rich as hell, too. But I ain’t holding my breath waiting for that particular paper to actually be worth what it says it’s worth on the front.

  14. Whoever asked for more economics articles, fuck you. We now get THIS piece of economic drivel from Shackford. The idiot even quotes a Keynesian magazine as economic intelligence.

    The US defaults on its debts every day by printing money. Greece and Puerto Rico cannot print their own money, so they have to do the direct bondholder haircut. The US can do a stealth default, and they will no matter who is in the White House.

    A direct default is an honest default. So now Trump is evil because honest????

    1. The US has a very long history of defaulting on its debt. Roosevelt ended gold ownership, and thereby deprived citizens of their rights to collect interest and principle on sovereign debt in gold. Nixon formally closed the gold window, and thereby deprived foreign dollar holders of their rights to exchange dollars for gold despite Bretton Woods guarantees. Since then, government has grown M1 money from $0.25 trillion to $3.2 trillion.

      Default is baked into the US system. Trump is just suggesting an honest default that would mainly affect the rich and the affluent middle class. It’s politically insane, but that’s how Trump rolls.

      1. Don’t whitewash the 1934 Liberty Bond Default by FDR and Congress. Ending private gold ownership was a whole different bad.

        Nixon did not prevent Americans from exchanging dollars for gold, he got Congress to let Americans buy gold for the first time since FDR. It went into effect in 1975, after he resigned from office. They just could not buy it straight from the treasury. You can buy all you want now.

        Careful, if you drop MORE THAN $10,000 CASH your gold purchase will be reported to the IRS just like any other transaction of that amount.

        You now have other reporting requirements for selling your gold.

        1. And if you buy between $8,000 and $9,999 they might decide you are trying to skirt the reporting law and steal your gold under asset forfeiture.

          1. Yep, it is the perfect law that the courts interpret in the same manner as Leftoids reading the Bill of Rights.

  15. fiscally incoherent polices that call for both tax cuts and military spending increases (while maintaining Social Security)

    These were also Regan’s policies. But he was the greatest POTUS and Trump is an evil nutcase.

    Here’s hoping Shackford starts working for The Atlantic or Salon soon.

    1. The orange is strong with this one. Let the orange flow through. Feel its power!

    1. This is hilarious.

  16. But the entire architecture of the global economy and the United States place in it rests on the certainty and basic risklessness of US government debt obligations.

    Maybe it’s time the entire global economy stopped being based on a lie. The myth of lack of risk is what has allowed the bubble to proceed.

  17. The US defaulted on the dollar, and all it’s bonds, in my lifetime when it closed the gold window.

    I think it’s funny that we’re going to default on promissory notes (bonds) for promissory notes (dollars) we defaulted on almost 50 years ago. And that people get their undies in a wad over it.

  18. Jeb Bush says he won’t vote for either Trump or Hillary

    Is he having a Libertarian moment?

    Seriously … this guy can’t sit it out ’cause to his kind voting is the high sacrament of democracy. He surely can’t vote Green, and he should know that Gary Johnson is not a kook since they were both governors at the same time.

    1. No, he’s trying to position himself to be the front-runner in 2020, when he thinks all of America will rue their rejection of him and realize that he should have been the nominee…as was his due as a mediocre governor and scion of the Bush Dynasty.

  19. Trump’s perception of how debt works (“I am the king of debt. I do love debt. I love debt. I love playing with it,” he said)

    As ever, meaning comes from context. Here’s more from that interview:

    Despite his “love” for debt, Trump is worried about another debt-related issue: how much the U.S. has to pay in interest on its $19 trillion of debt.

    “If interest rates go up one percent, that’s devastating,” the presumptive GOP nominee for president told CNBC on Thursday. “What happens if that interest rate goes up 2, 3, 4 points? We don’t have a country.”

    http://money.cnn.com/2016/05/0…..et-yellen/

    I can’t find it now, but his remarks on PR were along the lines of they don’t have the money (true), they will have to cut their debt way back (true), and they will have to cut back their spending as well (I think he said or implied this).

    There’s more than enough to beat Trump up with. You don’t have to mischaracterize what he says.

    He’s making a fundamentally valid and important point (with a characteristic exaggeration at the end), and he’s the only one making it. 5% interest on Treasuries equals about a trillion a year in interest. That’s catastrophic.

    1. 5% interest on Treasuries equals about a trillion a year in interest. That’s catastrophic.

      No, it’s “stimulus”

    2. “If interest rates go up one percent, that’s devastating,” the presumptive GOP nominee for president told CNBC on Thursday. “What happens if that interest rate goes up 2, 3, 4 points? We don’t have a country.”

      This is very true. Trump understands this better than most Democrats who want to borrow more and more.

      A few points of interest up, and we’d be cutting entitlements. No choice.

  20. When has a government deep in debt ever NOT defaulted? I’m looking for examples.

  21. Does anyone actually think the US even could pay it’s debt off at this point? Defaulting now!

  22. At first, I had the same reaction as Reason. OMG.

    But then I realized, that really, Trump was saying nothing more than what Krugman says:

    Borrow a ton of money for infrastructure and if it doesn’t work, default.

    Krugman leaves off that last part, but its kinda implied, no?

    Trump is pivoting to the left. Keynesian infrastructure spending will appeal to many voters.

    (I don’t think it works, but electorally…)

  23. Without massive spending and entitlement cuts, the way we are going, it’s either default or devaluation. Creditors are not going to care about the difference. Democrats and Republicans who are pretending that they can somehow avoid making those hard choices are either liars or fools.

  24. “A forced deal would amount to a default.”

    Not really. A deal is what you get instead of a default. A default is what you get when there is no deal.

    1. To the idiotmobile!

  25. It’s flabbergasting to me you finally have a candidate willing to address the debt and Reason is shitting on him.

  26. it’s black letter text in the US constitution that the country’s debt can never even be questioned. Defaulting on the national debt would clearly be unconstitutional.

    That’s not what it means. It means anybody who the $ is owed to has an undisputed right to it. It doesn’t mean they can’t accept a smaller amount or renegotiate it.

  27. I am anti-Trump (wasn’t sure where to start here)

    All these words and not one mention that defaulting on debt is not unprecedented at all on the US?
    A Short History of US Credit Defaults

    The 1979 incident cannot be ignored, the feds were actually taken to court and settled. Sometimes shaming works. A more important event was the Liberty Bond Default of 1934. Several others at that link also.

    The quoted article has this gem, that is one of the more repeated lies of history “In other words, the US always pays its debts in full and on time.” In reality, no they do not.

    “Indeed, it’s black letter text in the US constitution that the country’s debt can never even be questioned.” The Second Amendment is black letter text too. How is that going?

    This is not new information. Everybody who has taken an undergraduate bond class in college SHOULD have been told that the US government has indeed defaulted on debt in the past.

  28. There seems to be a circular argument from economists when it comes to the national debt. The debt is good and safe because we say it’s good and safe. That’s all they ever say. It’s simply defined to be that way because “full faith and credit of the United States”.

    So since that’s a given postulate, they simply print money and keep the illusion going to infinity. Can it go to infinity or can there be a sudden shock that brings the whole thing down as the doom-sayers think?

    1. Can it go to infinity

      No. The only exit is inflation. And the Top Men have tried time and again to get juuuust enough inflation, and had it run away from them just about every time.

    2. Actually, top economists do occasionally have a problem with the national debt. Those occasions always coincide with a Republican president in office. It is a perfect correlation, but top economists have yet to receive enough funding to determine if there is a cause behind said correlation.

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