After his unconventional approach which has helped him become the front runner in US Presidential race, Donald Trump suggested another unconventional idea to achieve economic recovery. As per a telephonic interview to CNBC Trump suggested that he would stimulate growth through borrowing and if trouble arose he could get investors to accept reduced payments for their Treasury holdings. According to Experts such a move if it does take place will lead to doom of not only US but the world economy as people will loose trust in US financial stability.
Such a move, never before attempted by the U.S. government, would likely spook investors whose trust in Treasury notes keeps global financial markets operating.
The need to refinance would likely cause interest rates to spike as investors demanded a greater return for the perceived risks of non-payment. More tax dollars would have to go toward repaying the debt. Many investors would shift their money elsewhere. And the economy could endure a traumatic blow.
“It seems Trump is planning to try to run the country like one of his failed business ventures, and that does not bode well,” said Megan Greene, chief economist at Manulife.
The move would also end a policy introduced during the presidency of George Washington — and celebrated in the Pulitzer Prize-winning Broadway musical “Hamilton”— to pay full face value on the debts incurred by the country. The government’s unfailing payments of its debt have long pleased investors and supported the economy because the country can borrow at lower rates than it otherwise could.
“Defaulting on our debt would cause creditors to rightly question the ‘full faith’ commitment we make,” said Tony Fratto, a former Treasury Department official in George W. Bush’s administration. “This isn’t a serious idea — it’s an insane idea.”
Trump has touted his acumen for restructuring four of his companies under bankruptcy laws. When Trump Hotels & Casinos finished a 2004 bankruptcy reorganization, it cut $500 million off $1.8 billion in debt and reduced the interest rate to 8 percent from 15 percent.
“I don’t think it’s a failure’ it’s a success,” Trump told The Associated Press at the time.
But countries function differently from businesses. Nations usually print their own money and service their debt through taxes, unlike corporations that can sell off assets and equity stakes to manage debt or close up shop. Interest rates would spike if a government refused to pay what it owed as investors priced in the risk of default and became resistant toward lending.
“It would make a bad situation worse and increase U.S. borrowing costs on its debt going forward because we would have lost our credit rating,” said Chad Stone, chief economist at the Center on Budget and Policy Priorities.
Publicly held U.S. debt is $13.8 trillion, and taxpayers will devote likely $255 billion to interest payments this year. The market largely sets interest rates on the debt, based in part on Federal Reserve policy.
The yield on a 10-year Treasury note is about 1.8 percent, a figure that would shoot up if Trump pursued this strategy. This would cause debt payments to climb at a precarious moment for the federal budget when Social Security, Medicare and Medicaid costs will likely increase the need to borrow.
“There is no upside,” said Douglas Holtz-Eakin, an economist and president of the conservative American Action Forum. “It’s a false hope.”
The federal government flirted with default risks in 2011 and 2013 when President Barack Obama and the Republican-led House of Representatives reached an impasse over raising the government’s borrowing limit.