The U.S. has $19 trillion in debt, and Donald Trump is upset about it.
Once upon a time, he said he would get rid of all of it in eight years. He walked that back, but his positions on how to handle that debt are still making headlines. Just a few days ago, it seemed like Trump wanted to renegotiate America's debt with the nation's creditors — a potentially disastrous policy. Then it seemed like he was offering a subtler solution. Then he said the U.S. government could print money to stave off default.
Nothing — not even policy positions — sit still for long in the 2016 election. This same weekend, Trump clarified his positions on two other major economic policy areas. If you haven't been keeping up, here's a quick recap of Trump's changing statements:
What did Trump initially say about debt?
On CNBC's Squawk Box on Thursday, Andrew Ross Sorkin initially brought up the idea of renegotiating debt repayment, in the context of Trump's past business dealings. Here's a video and transcript, emphasis added.
ARS: Do you believe that we in terms of the United States need to pay 100 cents on the dollar? Or do you think there's actually ways that we could renegotiate that debt?
DT: I think, look. I've borrowed knowing that you can pay back with discounts. And I've done very well with debt. Now of course I was swashbuckling, and it did well for me, and it was good for me and all of that. And you know debt was always sort of interesting to me. Now we're in a different situation with a country, but I would borrow knowing that if the economy crashed you could make a deal. And if the economy was good it was good so therefore you can't lose. It's like you make a deal before you go into a poker game. And your odds are much better.
That bolded bit, about making a deal on debt, caused mass freakout in the financial press, and for good reason. Suggesting that U.S. creditors accept haircuts on U.S. debt (that is, accept lower payouts than they agreed to) would be an unheard-of, potentially disastrous policy proposition.
But then his meaning got muddier. Anchor Becky Quick asked him twice if he really meant he wanted to renegotiate debt. On his second answer, he seemed to change positions:
BQ: You're not talking about renegotiating sovereign bonds that the U.S. has already issued.
DT: No, I don't want to renegotiate the bonds, but I think you can do discounting. I think depending on where interest rates are, I think you can buy back. I'm not talking about with a renegotiation, but you can buy back at discounts, you can do things at discounts. I'm not even suggesting that we don't borrow money at very low rates long term so we don't have to worry about when they come due.
So what exactly was he saying?
Great question.
In that first answer, he seemed to say he would want creditors to accept lower payments.
And that's not just a big deal; that's a gargantuan deal. The prospect of investors in U.S. debt accepting less on the dollar than they are owed could tank the economy (more on that later).
But even then, his later answer made muddier exactly what he meant. Trump went on to say he didn't want to "renegotiate" but rather wanted to "discount" or "refinance" U.S. Treasurys. That could very well mean he still wanted to offer creditors lower rates, said one economist. But there's another reading.
"He keeps mentioning interest rates, so being charitable, he could mean that the United States should buy back debt when its price falls," said Michael Strain, economics fellow at the right-leaning American Enterprise Institute.
What's the fuss?
If the government asked investors to accept less on the dollar than they are owed, it would be phenomenally bad for the economy.
"There are no merits to it," Strain said. He added, "The extent to which U.S. Treasurys are kind of the foundation on which the global financial system is built is really hard to overstate."
For one thing, it would send interest rates on Treasurys soaring and destroy the U.S. Treasury's risk-free status. That's what Strain means by "foundation"; right now, everyone knows and trusts that U.S. debt is a safe investment. Treasurys are used in all sorts of financial transactions worldwide. They're in many people's retirement accounts as a low-risk asset. Rattling faith in that Treasury would introduce massive amounts of uncertainty into the economy.
Plus, it would cause interest rates on U.S. debt to soar. That would mean higher borrowing costs for the U.S. government — making the very fiscal situation Trump is worried about even worse.
All of this could dry up credit markets, as the uncertainty could make banks far less likely to lend money. Cut back on borrowing and lending, and you deliver a huge blow to the economy.
It's not even clear how this idea would work, says one financial expert — creditors wouldn't have much of an incentive to take the deal, with the U.S. currently on firm financial footing.
"Typically the goal of a sovereign default is for a country to reset its borrowings base in order to make sure it can be fiscally sustainable going forward," said Guy LeBas, chief fixed income strategist at Janney. "And creditors or lenders have an interest in participating in that process, because they believe they can get the best return from negotiation."
What is Trump saying now?
He says that all along, he just wanted the U.S. government to buy back debt at lower prices.
"If there's a chance to buy back debt at a discount, interest rates up and the bonds down, and you can buy debt. That's what I'm talking about," he said, as reported by Politico.
So if that's what Trump wants, how would this work? It's a complicated proposition, but Dean Baker at the left-leaning Center on Economic and Policy Research explains in a blog post:
"If interest rates rise, the situation Trump described, the market value of long-term debt falls. For example, a 30-year bond issued in 2015 at an interest rate of less than 3.0 percent, might sell for less than 70 percent of its nominal value if the long-term interest rate crosses 6 or 7 percent, which it certainly could.
"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."
Long story short: It would lower the debt level but raise the interest rate the U.S. is paying altogether, essentially trading one problem for the other. Why would we do that? In Baker's telling, this is a solution only insofar as someone cares a lot about nominal debt levels and debt-to-GDP ratios (and it's not clear that Trump does).
As LeBas told NPR, unless somehow the U.S. were running a surplus, buying back debt at a discount wouldn't do much good.
"If the U.S. were running a deficit and interest rates rose, the government could buy back its debt at discount prices," he said. "But then it would have to issue more debt at a higher interest rate to fund the buyback, which would be a wash."
Trump has also created new shock waves by saying — in this case quite clearly — that the U.S. can't default, because it prints money. That's true, but that doesn't mean it's good policy (as in, it could easily cause massive inflation).
What exactly has this whole exercise taught us?
Aside from the economics lesson, it provided a picture of one of the Trump campaign's biggest recent weaknesses. His clarifications on the U.S. debt also came in the midst of a weekend in which Trump clarified his position on two other major economic issues: Trump said he thought the minimum wage should be raised on a state-by-state level. In November, he had said in a debate that he thought wages were too high.
And in the same weekend that he wrestled with how to tackle the debt, he explained, then re-explained, his tax plan (which the Tax Policy Center said would raise deficits by $9.5 trillion over 10 years): He at first in an interview with NBC seemed to say he would raise taxes on the wealthy.
But then he clarified that he meant that after negotiating with Congress, taxes might end up higher than the low rates he initially proposed, but they would end up lower than they are now.
All of which is to say that it's not clear the Trump campaign has settled positions on a range of economic policy issues. These kinds of clarifications and policy shifts give the Clinton campaign ample ammunition for attacking Trump in two ways: one, for potentially harmful economic policies, and two, for not having firm policy principles.
That's bad for Trump. Any time that a candidate has to spend playing defense — explaining policies or wording choices, for example — is time he or she is not spending playing offense.
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