Donald Trump Actually Isn’t The First To Threaten Default On US Debt by Caroline Baum, Foundation For Economic Education
Who’s the Real “King of Debt”?
The outrage was palpable. Here was Donald Trump, l’Enfant Terrible of the 2016 presidential campaign, who has offended everyone from women to Muslims to Mexicans, going where no candidate had dared to go, threatening the unthinkable: a default on the national debt.
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“I would borrow, knowing that if the economy crashed, you could make a deal,” Trump said in a CNBC interview last week.
Alternatively, he said the U.S. government could make a Trump-type deal with its creditors to repurchase outstanding debt at less than face value, the equivalent of default.
No one took him seriously, of course. When the U.S. government was late in redeeming Treasury bills in 1979, the result of a back-office glitch, yields shot up 60 basis points. With $19.2 trillion in debt outstanding, of which $13.8 trillion is held by the public — foreigners hold about 45 percent of publicly held debt — the last thing a potential president should intimate, even in jest, is default.
“Such remarks by a major presidential candidate have no modern precedent,” the New York Times tut-tutted in a May 7 article.
What about remarks by an actual occupant of the White House? On several occasions over his two terms in office, President Barack Obama and his Treasury secretary — both Tim Geithner and Jack Lew — have used the threat of default to pressure the Republicans to raise the statutory debt ceiling. I have argued that the leader of a debtor nation, proprietor of the world’s reserve currency, should never throw the “D” word around lightly. The president of the United States of America should assure holders of Treasury debt that the nation will make timely payment of principal and interest under any and all circumstances.
During the 2013 debt-ceiling showdown, Obama and Lew skillfully used the threat of default to turn public sentiment against the GOP, which was holding the debt ceiling hostage to other priorities. Yields on very short-term T-bills shot up as much as 30 basis points. Where was Paul Krugman’s “horrified amazement” — his description of the cognoscenti’s reaction to Donald Trump’s default ruminations — back then? (Blaming the Republicans, of course.)
In any given month, the Treasury takes in far more in tax receipts than it owes in interest. Yes, Treasury would have to stiff Social Security recipients and other beneficiaries of government programs, but that doesn’t qualify as a default as far as Moody’s and Standard & Poor’s rating agencies are concerned.
Treasury has said publicly — in 2011, 2013 and again in 2015, when the U.S. was up against its borrowing limit — that it cannot prioritize payments. In other words, it does not have the authority to decide to pay bondholders and not military salaries; to pay interest to the People’s Bank of China and not make disability payments. What’s more, the department claims its computers would have to be re-programmed in order to select which of some 80 million monthly payments to process.
However, in a 2014 letter to Jeb Hensarling, Chairman of the House Financial Services Committee, an aide to Secretary Lew admitted that it was technically possible for the Federal Reserve Bank of New York to make principal and interest payments on U.S. Treasury securities while the Treasury halted other payments. The aide stressed that any such protocol was untested.
The Government Accountability Office, formerly known as the General Accounting Office, has a different interpretation on prioritization. Asked by Congress in 1985 about the Treasury secretary’s authority to prioritize payments absent the authority to borrow, the GAO said Treasury was free to determine in which order the outstanding obligations should be paid “to best serve the interests of the United States.”
If late payment of interest due to a computer glitch can send T-bill rates soaring, imagine the damage an actual default could do. The U.S. would have to pay substantially higher rates to borrow, which would make future deficits an even bigger burden. When it comes to debt markets, confidence lost is not confidence easily regained.
Donald Trump’s latest verbal escapade on a U.S. debt deal with creditors has even less chance of coming to fruition than making Mexico pay for that wall he plans to build. What I don’t understand is, where were the economists, pundits and journalists when Obama used the threat of default, even if he didn’t mean it, to his own political advantage?
OK, you say, it’s not the same thing. Trump was just being Trump, after all, unwittingly demonstrating his policy ignorance and his complete disregard for the system.
And what about Obama’s insincere threats of default? That wasn’t reckless? Before a sitting president threatens the unthinkable, he should consider how it might translate into Chinese.