Trump the Debt
Needless to say, Donald Trump has expressed some odd ideas on the US national debt. He has argued that we can’t afford this or that because we are 19 trillion in debt, promised to pay back the debt in 8 years, & asserted that the debt is no big problem (one out of three right is not bad for Trump). But now he’s gone and done it — twice.
Many people are focusing on Trump’s interview with CNBC including “I would borrow, knowing that if the economy crashed, you could make a deal.” This statement is a major threat to the world economy. It is also forbidden by the US Constitution Amendment 14 Clause 4 “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. … ” This partially repealed the 1st Amendment protections of freedom of speech and the press. Trump violated the constitution. Josh Marshall (once a history graduate student) noted this.
It’s also absurd. The US Federal Government doesn’t have to renegotiate or repudiate dollar denominated debt, since it can make as many dollars as it pleases (the Fed is independent exactly as long as it pleases Congress that the Fed be independent).
But I am interested in another amazing TV interview
On Fox (no link) Trump told Bret Baier (as quoted by Greg Sargent link)
BRET BAIER: You’ve been very clear on the stump that you oppose any reform of Medicare, Medicaid, Social Security. Yet you told the Washington Post you would eliminate $20 trillion in U.S. national debt in eight years.
TRUMP: No, no. I think what they really were referring to — I’m very good at understanding banking, debt, all of that. I’m one of the all time professionals. We can cut, we can discount, we can buy at discounts, we can see where interest rates…
BAIER: Without changing those three things?
TRUMP: No, we can discount debt. For instance, we may refinance when interest rates are so low. A lot of people think we should refinance, taking some extra money and redo the infrastructure of our country. You know, we’ve spent $4 trillion plus in the Middle East. [snip]
Uh no Donald. You have extensive experience with debt, but the US Treasury can’t refinance. Standard mortgage contracts have the feature that the debtor can repay the principal at any time. But Treasury bonds, notes and bills do not have this feature. If the Treasury wished to refinance, it would have to buy them on the open market. It could then issue new bonds, notes and bills. There would be no point. The decline in interest rates since the time the bonds were issued implies a capital gain for investors who own the bond. It doesn’t imply that the Treasury can get extra money by buying and selling bonds.
Trump doesn’t understand the concept of a bond. They aren’t mortgages. They aren’t debt contracts including the right to prepay.
“This partially repealed the 1st Amendment protections of freedom of speech and the press.”
Nice to finally hear someone else say that!
Let’s just say Trump’s information knowledge is out of date:
“For certain bonds issued before 1985, the U.S. Treasury reserved the right to stop paying interest before the bonds matured. When the Treasury ‘called’ a bond, the bond stopped paying interest on the date of the call, before the maturity date.
“The final bond call occurred in 2009. No more bonds are eligible to be called.”
https://www.treasurydirect.gov/indiv/research/indepth/tbonds/res_tbond_call.htm
Corporate bonds, with which he is more familiar, are usually callable.
As Dean Baker wrote, there could be a point:
“The Treasury could buy up long-term debt in the market at its current market value, and replace it with new debt that paid a higher interest rate. This won’t change the interest payments owed by the government, but it would reduce the nominal value of the debt outstanding. There is no logical reason to take this sort of step, except that many of the Very Serious People in Washington assign great value to the ratio of debt to GDP. ”
Trump’s new finance chair is from Goldman Sachs. They know what they’re talking about.
But who knows? Hopefully the Democrats don’t botch the election so we don’t have to find out the answer to this and other questions about Trump.
My guess is that he’d be like George Bush and do tax cuts for the rich and in addition would do some infrastructure spending rebuilding airports etc (which is why Paul Ryan does’t like him). Every one of his speeches he describes the third world nature of our infrastructure. He’d probably also build some statues and murals of himself.
He’s said some normal things about monetary policy – unlike Hillary who has said nothing – and would probably pressure the Fed to keep rates low.
Dear Warren
thanks for the information.
Dear Peter:
two things: Trump speaks off the top of his head — he definitely didn’t consult with his finance chair who has already tried to walk back the suggestion that the USA can “make a deal” with its creditors.
http://talkingpointsmemo.com/livewire/trump-finance-chair-debt-idea
Baker was speaking in the pure hypothetical. To be more detailed –* if*interest rates had *increased* since bonds were issued, then the face value of US public debt could be reduced by refinancing. That is, the market value of bonds would, in that counterfactual case, be less than their face value (aka par value) so the face value of debt outstanding would be reduced by refinancing.
However, interest rates are now near record lows. Most US Treasuries trade at more than their face value (there may be some recently issued Treasuries which trade below par – the data at the link are aggregates).
http://www.dallasfed.org/research/econdata/govdebt.cfm
Refinancing would *increase* the face value. It would be illegal, because of the (pointless and dangerous) debt ceiling. Trump said refinancing would be a good idea because interest rates are low. Baker’s (valid) point has no relevance to any discussion of Trump’s statement
Even in this hypothetical case, as noted by Baker, refinancing would still not change the Treasury’s intertemporal budget constraint — it would change the face value of debt for the purposes of the debt ceiling, but that’s just because the debt ceiling is stupid policy implemented in a stupid way.
However, if the Treasury were willing to cheat on the debt ceiling there would be no problem. Bonds have a face value coupons. The ceiling refers to the sum of face values of treasury securities. A bond with a face value of 1$ and montly coupons of $1,000,000 each would count as 1$ of national debt for the purposes of the debt limit. The Treasury could raise uh more than $1 by selling such a bond.
It could also mint a $ Trillion platinum coin which doesn’t count as debt.
Or (correctly) argue that the debt ceiling is unconstitutional.
But in any case, it can’t even get more room under the debt ceiling by refinancing by buying back bonds issued when interest rates were higher. That has an effect which is relevant only to the debt ceiling, but it is the opposite of the effect Trump imagined.
He doesn’t know what he’s talking about (note that his extensive experience in finance consists largely of his firms going bankrupt).
Robert:
You are being way to kind.
“To be more detailed –* if*interest rates had *increased*”
The increased in December and the Fed may increase them more in June and as labor markets tighten. The Fed is sure itchin’ to “normalize.”
Look I’m going to vote for Hillary and hope the Democrats don’t botch the election, but what Trump knows how to do is negotiate from a position of power. That’s why he has money. That’s why his voters like him.
When you negotiate from a position of power, you screw the other person. The U.S. government is awfully powerful and only constrained by laws, which can be changed. This is what Paul Ryan and others don’t like. This is why Cheney calls him a liberal.
For instance Trump said he’d negotiate better with the pharmaceutical companies, (with China, Mexico) etc.
Peter:
We already did this. Trump thinks he hit a home run when in reality he woke up on third base when he was born and just trotted to home plate. In other words, the supposed self-made man with the perpetual skin coloring and blondish hair combed-over was born into money. He is a fraud, fake, womanizer, bigot, racist, misogynist, bully, etc. He is not to be admired.
Okay, so he would borrow, knowing that if the economy crashed, he could make a deal. So who will be the ones sitting across the conference table from him, their lawyers and financial advisors in tow? I’m trying to figure this out, because I think maybe I should buy a Treasury bond, or at least a bill, or maybe just a note, which I guess would give me the opportunity to meet the president. In a conference room, as adversaries. But still. Way less expensive and time-consuming than, say, becoming a bundler for the super PACs that Trump now says he’ll support. And certainly cheaper than hiring a team of lobbyists to get my policy demands to him.
And this probably is so even though he’s now telegraphed his intention to have the Treasury partially default on these financial instruments at the first sign of a recession, which would ensure that the economy would completely crash and not recover for a very long time, thus quickly causing a full default. I think.
But about this refinancing thing. Which I guess is separate from the partial-default deal, although it too would involve a lot of separate deals since even the too-big-to-fail banks, even all together, probably couldn’t give a loan to the Treasury in the amount of hundreds of billions of dollars. Or, if they could, they probably wouldn’t. Which is something that Bernie Sanders could tell you. If you asked him. I’m wondering about the collateral for this refinancing loan. I mean, the federal government does own all that land out west that Cliven Bundy and his supporters always complain about and think should be turned over to the states the land is in. Or to Cliven Bundy and his followers.
But land values go up and down based on the economy in the region, and unless this refinancing deal was completed before rather than after Treasury announced its intent to default, even partially, on Treasury bonds, bills and notes, the market value of that land probably won’t be nearly enough for collateral. And of course now that everyone knows that Treasury will be defaulting sometime not long after the loan to refinance is made, I don’t think those banks will be willing to risk making the loans. The lands would quickly be underwater. Well, the loans would be, though the lands won’t be worth much more than if they actually, literally were underwater.
Unless … unless … the banks could quickly sell those loans, which really would be mortgages, as mortgage-backed securities.
Which I guess is the plan.
Warren, the 14th Amendment provision quoted did not repeal the 1st Amendment right to freedom of speech. You and anyone else can say what you wish. What you can’t do is get the law to allow the U.S. Government to go into default as the Republicans in the House threatened to do. Unfortunately, President Obama didn’t seem to understand this, relying on bad legal advice from Lawrence Tribe. Most of us kept urging him to get another lawyer. That became unnecessary when the House Republicans backed down.
In other words “questioned” means legally, not vocally.
“[The] debt ceiling is unconstitutional.”
How do you come to that conclusion?
“What you can’t do is get the law to allow the U.S. Government to go into default as the Republicans in the House threatened to do.”
That is a total fabrication. The is, and has always been, sufficient tax revenue to service the debt. Default was never on the table.
Warren,
For your own good, try not to talk.
Warren, the debt ceiling was the problem and its unconstitutionality is revealed in the provisions of the 14th Amendment. It is not unconstitutional per se but it is when it interferes with the U.S. paying its debts.
Warren: What JackD said. I think the debt ceiling is inconsistent with the “shall not be questioned” clause of the 14th amendment. If that clause means anything, it means no law which might prevent the US Treasury from paying its debts is constitutional.
JackD: What Warren said. I admit I am not a lawyer, but I see no ambiguity in “shall not be questioned”. Your view that “questioned” refers to legislating and not to speech seems to me to be inconsistent with the plain meaning of the word and unsupported by any text, context, or analogy. I don’t see any logic supporting the view that the 1st amendment was left unchanged by the 14th. To me this seems like suggesting that the 18th amendment is as it was before ratificating of the 21st.
In any case, it doesn’t matter. The “shall not be questioned” clause does not establish any penalty for such forbidden questioning. I think it would become relevant only if Contress passed a law punishing such questioning. I think that purely hypothetical law would be constitutional, but it will never be passed, so we don’t have to reach agreement on the relationship between the 14th and 1st amendments.
“[The] debt ceiling was the problem and its unconstitutionality is revealed in the provisions of the 14th Amendment. It is not unconstitutional per se but it is when it interferes with the U.S. paying its debts.”
But the debt ceiling has not interfered with the U.S. paying its debts. Even if the debt ceiling had not been, there has always been more than enough tax revenue to service the debt.
I submit that it would have been unconstitutional for the administration to have stopped debt service just because the debt limit was reached.
Warren in what conceptual world does it make sense to limit “paying its debts” to simple debt service while excluding principal redemption?
To say nothing of limiting “debt” to Treasuries and not including legally binding contractual agreements?
This was a wingnut talking point during the government shutdown but had no basis in law or history that I could ever see. “No I am not defaulting on my car loan, see here is the interest payment”.
A kind word here is “bushwa”.
“[In] what conceptual world does it make sense to limit ‘paying its debts’ to simple debt service while excluding principal redemption?”
Principal redemption is, when it is due, part of paying one’s debts. There has always been sufficient revenue to do that.
“To say nothing of limiting ‘debt’ to Treasuries and not including legally binding contractual agreements?”
Such as? The U.S. government sets up contracts such that it can unilaterally terminate them at any time for any reason, or for no reason at all.
Warren do have evidence that the U.S. can unilaterally cancel any and all defense contracts at any time for any reason? I call bullshit not bushwa.
And you equally claim without any evidence at all that there has alway been sufficient revenue to redeem ALL Bills and Notes as they come due even as the U.S. is hard up against the debt limit. How does this work in practice? These Bills and Notes are currently rolled over via new sales of (duh) Bills and Notes. How does the Treasury get the authority to sell new Bills and Notes in this case?
The whole concept is crap. The U.S. is not going to just stop paying its Army, Navy and Air Force or stop buying fuel for its tanks, ships and planes so as to reserve cash flow to redeem principal that otherwise would have been rolled over via issuance of new debt. Like Trump you have taken an idea from corporate finance, that of ‘senior debt’ and brought it into an operational, economic, political and financial reality where it is sheer fantasy.
“[Do] have evidence that the U.S. can unilaterally cancel any and all defense contracts at any time for any reason?”
http://farsite.hill.af.mil/reghtml/regs/far2afmcfars/fardfars/far/49.htm
“And you equally claim without any evidence at all that there has alway been sufficient revenue to redeem ALL Bills and Notes as they come due even as the U.S. is hard up against the debt limit.”
Yup, and all you have to do to disprove that assertion is to come up with a single instance in which that was not so.
“How does this work in practice? These Bills and Notes are currently rolled over via new sales of (duh) Bills and Notes. How does the Treasury get the authority to sell new Bills and Notes in this case?”
Since the Treasury would be redeeming and selling bonds for the same face value, it would be a wash. No new authority would be required, since the debt would not increase. We do it all the time.
http://cnsnews.com/news/article/terence-p-jeffrey/roll-over-plan-treasury-needed-pay-record-75t-maturing-debt-fy-2013
“The whole concept is crap. The U.S. is not going to just stop paying its Army, Navy and Air Force or stop buying fuel for its tanks, ships and planes so as to reserve cash flow to redeem principal that otherwise would have been rolled over via issuance of new debt.”
Of course not. The increase in the debt is only how much more the U.S. government spend than it collects. Rolling over principal does not affect the debt limit whatsoever.
Interest on the debt for FY16 is $283B.
Federal revenue was $3,525B.
https://www.gpo.gov/fdsys/pkg/BUDGET-2016-BUD/pdf/BUDGET-2016-BUD.pdf
Only 8% of revenue goes to servicing the debt.