I’ve often joked very tongue-in-cheek that Donald Trump is the only person qualified to be President simply because he’s declared bankruptcy four times.
Trump himself talks up his own debt credentials, saying “I’m the King of Debt,” and “I know more about debt than practically anybody.”
He’s flat wrong, of course.
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
Trump may have racked up billions in debt for his companies, but Barack Obama has racked up more debt for America than anyone else in the history of the world.
That said, Trump does have mad street cred when it comes to debt.
In 1991, 1992, 2004, and 2009, Trump filed under Chapter 11 of the US Bankruptcy Code to reorganize his business debts.
Each of these constitutes a default, i.e. a violation of the original terms between the borrower and the lender.
And as I joke (only half-kidding), that’s precisely what America needs: default.
Stop kicking the can down the road, admit that you can’t pay your obligations, hit the reset button, and get on with it already.
Yet anytime I talk about US government debt, there’s invariably a voice in the crowd that says, “yeah, but we owe it to ourselves. . .”
This is one of the biggest lies in finance.
People have actually become convinced that the US government’s $19+ trillion nominal debt, and $60+ trillion total debt, doesn’t seem to matter because ‘we owe it to ourselves.’
First of all, is this true? Sort of.
According to the Treasury Department, foreigners hold roughly $4 trillion of US government debt.
The rest of it—the vast majority of US debt—is owed to various domestic agencies, banks, and citizens.
The #1 owner of US government debt, in fact, is Social Security… in other words, all current and future American retirees.
Next comes the central bank– the Federal Reserve, which holds $2.46 trillion worth of US government debt according to its most recent balance sheet.
Just on the heels of the Fed are other US government agencies (like the Defense Department and the FDIC) which also own US debt.
Then, of course, are all the thousands of banks and pension funds in the United States, which routinely buy US government debt.
And last but not least are all the individuals and companies across America who own US government debt as part of their portfolios.
So, yes, a minority portion of US debt is owed to foreigners.
What eludes me is why anyone thinks this is OK…
It’s like saying, “well I owe grandma a million bucks, but she won’t mind if I don’t pay.”
Ummm. Come again?
The US government is totally unable to pay its debt. The debt has been rising for decades, and they haven’t been able to run a budget surplus in 20 years.
Not to mention they have to borrow money just to pay interest on the money they’ve already borrowed at a time when interest rates are at historic lows.
Debt is already over 100% of GDP, and even the government itself predicts this number to rise.
At this point default is an almost mathematical certainty. The question is– default on whom?
Defaulting on the debt owed to Social Security means that hundreds of millions of current and future retirees have their lives turned upside down.
Defaulting on the Federal Reserve means that the Fed will become formally insolvent, creating a massive currency crisis in the Land of the Free.
Defaulting on other government agencies means that the Defense Department (among others) won’t have any more money to operate… so they’ll just end up increasing your taxes to make up the difference.
Defaulting on banks and pension funds would cause every bank to fail, creating an unprecedented financial catastrophe.
So the fact that ‘we owe it to ourselves’ means the debt is even MORE important. And that’s what’s so scary.
Think about it– it would actually be better if the US government owed 90% of its debt to the Chinese.
In that case, they would simply make the Chinese out to be evil, and then selectively default on that debt.
The rest of the world would probably go along with it, and America would get a pass. US citizens, banks, corporations, etc. would be largely unaffected.
But that’s not going to happen.
There’s a lot of tough talk about negotiating the debt with the Chinese… but this is all hot air.
Even if they default on the Chinese, they still owe tens of trillions to Americans that they have absolutely no hope of paying.
Some people think, ‘well can’t they just restructure the debt?’
No. First of all, restructuring is just a fancy way of saying ‘default’.
It means that you’re not going to honor the terms of the original agreement, and instead work out more favorable terms to pay off the debt.
But… what terms can possibly be more favorable?
Uncle Sam is already paying record low interest. There’s nothing left to restructure… no terms they can renegotiate which are more favorable than they already have.
Bottom line, the US government can’t possibly meet its obligations… so the only hope is to default.
They’ll either outright default and cause any number of major crises in the financial system or the American retirement system.
Or they’ll default on the promises they’ve made to their taxpayers, including the solemn obligation to maintain a sound currency (something they already abandoned long ago.)
Look, understanding this reality doesn’t mean that you’re negative or pessimistic.
There’s nothing pessimistic about acknowledging basic arithmetic.
It’s also no cause for panic. It might take years for these consequences to be realized.
But that’s no excuse to follow their lead and kick the can down the road. Building a great Plan B takes time, and it’s founded on one very simple principle:
It makes absolutely no sense to hold EVERYTHING in your life—your home, savings, investments, business, retirement funds, etc. in a country where the government truly is the King of Debt.