KingMidget's Ramblings

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In Case You’re Wondering


Via DailyKos via The Washington Post via Donald Trump’s interview on CNBC on Thursday:

“I am the king of debt. I do love debt. I love debt. I love playing with it.” Trump said.

“Do you believe that we, in terms of the United States need to pay a hundred cents on the dollar, or do you think that there’s actually ways that we can renegotiate that debt?” CNBC’s Andrew Ross Sorkin asked him.

“Yeah, I think — look, I have borrowed, knowing that you can pay back with discounts. And I have done very well,” Trump said. “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.”

Let’s sit back and analyze this statement.  Trump loves debt.  He LOVES playing with debt.  Roll that around on your tongue for a bit, let it bounce around in your head for a bit as well.  Truth is, there is something to be said for using debt in the business world.  If you only finance things with cash upfront, it can be difficult to grow your business or take advantage of opportunities that come up.  Debt serves a valuable function in the business world.

It also plays a valuable function in government.  It’s how we finance much of our infrastructure needs — roads, schools, water works, etc.  So, yes, debt can be good.  But, really, nobody should really love debt.  But Donald Trump appears to.  Maybe it’ll be his fourth wife.

Then he mentions that he has borrowed “knowing that you can pay back with discounts.”  Again, roll that around on your tongue a bit, let it crash around a bit.  Here’s what he is saying — he has borrowed from creditors and investors knowing that he would not pay them back completely.  Think about that.  What he’s really talking about is renegotiating debt when a company gets into trouble.  You know, like filing for bankruptcy.  That is typically what happens in a bankruptcy.  There is a workout of the debt owed by the bankrupt entity that results in its creditors getting much less than is owed to them.  Sometimes that happens before bankruptcy papers are filed.  But, ultimately, you get to “pay back with discounts” when your company is in trouble and getting pennies on the dollar is more attractive to the investors than getting zero.

It’s actually not a bad idea for a troubled company, although Trump’s acknowledgement that he took on debt knowing that he would be able to renegotiate it is a somewhat shocking idea.  Think about it this way, what would happen if we all took on mortgages knowing we would need to renegotiate them?  Or we charged our credit card up knowing that we would only be able to pay 75% back?  This is basically what Trump is saying he does.

And what about government?  Would this work?  Well, maybe not.  And to be clear, this is what Trump was referring to — renegotiating U.S. debt.  Not included in that quote is that he thinks he could get the holders of U.S. debt to accept less than they have been promised.  Most government debt, including U.S. debt, is backed by the full faith and credit of the government issuing the debt.  What that means is that the government entity issuing debt promises to pay the full principal no matter what.  There are no ifs, ands, or buts when it comes to debt backed by the full faith and credit of the issuer.  If needed, the issuer will raise taxes or cut costs to be able to make its debt service payment.

As soon as there is any question about whether a government issuer is going to be able to make its debt service payment, the costs of borrowing go up.  Not just for that one government but for others similarly situated.  When a few cities in California filed for bankruptcy over the last few years, the costs of borrowing for many other California cities went up because of the fear that the problems would spread.

So, imagine if the U.S. Government, or the President, announces that they will seek to renegotiate their debt payments.  Here’s one way to look at it.  The debt owed by the U.S. government is now approximately $20 trillion.  According to the CIA World Factbook, the size of the world economy was about $107 trillion.  In other words, the amount of our nation’s debt is pretty significant when compared to the output of the world’s economy.  We are truly the dominant player in the world.  When we sneeze, the world gets a cold.  If we were to try to renegotiate our $20 trillion in debt, it would shake not just the U.S. economy, but the world economy.  And with a debt load that high, anything other than a massive reduction would ultimately be kind of meaningless.  And a massive reduction would have a deep and profound impact that would be felt for years to come.

And besides that … who would we engage in this renegotiation with?  The number of investment companies, mutual funds, foreign countries, and individuals who own debt issued by the United States is likely unknowable and uncountable.  And who is to say that any of them will accept any reduced payment?  According to one source, China owns approximately $1.2 trillion in U.S. debt.  Think about it.  Just think about it.

This is your potential U.S. President.  A man so utterly clueless and reckless.  I have heard people say that we need Trump in the White House because he’ll bring his business success and acumen with him and that will help him revive our economy.  Because he understands the economy better than those stupid politicians.  Here’s the thing about that belief.  Business men and women don’t necessarily understand the national or global economy any better than anybody else.  They know their industry, their niche.  Maybe.  But knowing that doesn’t translate at all into understanding the complexities and nuances of our current economic environment.  And Trump’s claim that he could just renegotiate the United States debt obligations is the starkest evidence of that.

There is an alternative to this.  In the 1990s, Bill Clinton was able to change the dynamic of the U.S. budget and created budget surpluses.  And while he was creating those surpluses, the American economy was exploding.  Think about it, instead of investing hundreds of billions of dollars in treasuries, those with money to invest were doing so in companies that grew and expanded.  I have no confidence that we’ll ever return to those days with the current state of things in American politics.  But there is an alternative.

Vote for the Trumpster at your peril.

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24 responses to “In Case You’re Wondering

  1. S.K. Nicholls May 7, 2016 at 5:44 pm

    We keep thinking Belize. There are two things stopping us. Easy access to our psych meds, which keep us sane, and family we’d likely not see very often. I just learned that my pharmacy company can ship to Belize we can get our Doc to prescribe long distance (not likely, but stranger things have happened), and quite frankly…close proximity to our family is what likely makes us dependent on psych meds. So there, problems solved.

  2. Kevin Brennan May 9, 2016 at 9:04 am

    Paul Krugman touched on this whole thing today too. It’s unreal. But as Krugman says, Trump is just amplifying things that the Republicans have been saying less flamboyantly for years now …

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