Great, Donald Trump Threatened To Default On The National Debt

Just great.

07/05/2016 8:04 AM AEST | Updated 07/05/2016 12:51 PM AEST
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Presumptive Republican presidential nominee Donald Trump speaks in Charleston, West Virginia, on May 5, 2016.

Analyzing Donald Trump policy proposals is a fool's errand. I am a fool: Behold my errand.

The presumptive GOP nominee has an idea for dealing with American debt and infrastructure. The first half of his plan makes sense. The second half is insane.

Trump laid out his plan during a CNBC appearance, which was flagged by Binyamin Applebaum at The New York Times. Interest rates on U.S. debt are very low right now, and have been for years. This makes it a great time for the government to borrow money and spend it on public needs. Roads, bridges, whatever. If there's something that needs fixing in the United States, borrowing money to fix it is a pretty good idea right now. The boost that this improved infrastructure will give to our economy will be worth it. The economy would grow, boosting tax receipts for the federal government which would make the new debt easy to manage.

Trump believes this. So does Paul Krugman. So far, so good. But then Trump suggests something truly destructive.

“I would borrow, knowing that if the economy crashed, you could make a deal,” Trump told CNBC. If the U.S. borrowed too much and invested its fresh cash in unproductive products, Trump would tell creditors to accept less than what he'd initially agreed to.  

Another way to describe this plan: "I would default on the national debt." Except Trump also told CNBC that he wouldn't default on the debt, because advocating contradictory positions is part of his #brand.

Even if you subscribe to Trump's wrong view of international finance, his comments are stupid.

The U.S. dollar is a global reserve currency. It is considered the least risky asset in international finance. If investors have to start taking haircuts on this debt, it means that the way money is measured around the world would be thrown into question. All kinds of businesses, both domestic and foreign, would grind to a halt as investors stopped to figure out how to sort out the mess. Even in a best-case scenario, the results would be catastrophic. Financial markets eventually sorted things out after the 2008 meltdown, but it still sparked the worst recession in 75 years. A default on U.S. government debt would be worse.

And there is no reason for the government to default.The U.S. government owes $12.8 trillion to the public. The majority of this money is owed to American citizens and businesses. And the annual output of the U.S. economy is currently $18.1 trillion and growing. The federal government collects over $3 trillion in taxes every year. The national debt just isn't that big a deal. If it were, you'd see investors demanding high interest rates on American debt. But interest rates are in fact very low, meaning investors think the U.S. will not have trouble paying its debts.

Even if the United States eventually saw interest rates rise, the government could easily deal with it by raising taxes or simply printing more money. Printing money would pose the risk of modest inflation over the long term, and inflation isn't an ideal way to deal with problems. But a little bit of inflation is way better than crashing the global economy.

But even if you subscribe to Trump's wrong view of international finance, his comments are stupid. He is violating his own Art of the Deal negotiation standards. If you have no intention of paying off a loan, don't tell the bank. Even if you manage to laugh it all off and get the deal, you're going to have to pay more for that loan. The bank would have given you better terms if it had never been forced to question your intentions. If you're going to steal something, just steal it. Telling everybody ahead of time makes it a lot harder.

But it doesn't matter that Trump said something insane and destructive. His fans do not care, and never have cared, about whether his policy positions are good or even coherent. Life is pain, and the 2016 election is making it more painful.

Zach Carter is a co-host of the HuffPost Politics podcast “So, That Happened.” Subscribe here or listen to the latest episode below. 

Editor's note: Donald Trump regularly incites political violence and is a serial liarrampant xenophoberacistmisogynist and birther who has repeatedly pledged to ban all Muslims -- 1.6 billion members of an entire religion -- from entering the U.S.

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