WEB DESK: Donald Trump, the presumptive candidate of the Republican Party for presidency of the US, has floated an idea which even a freshman in his economic class in a university would not like to consider or even imagine.
In an interview with the CNBC on 5th May, 2016, he asserted that he would stimulate growth through borrowings but if trouble arose, he would get investors to accept reduced payments for their treasury holdings. He based this recovery plan on his own experience with corporate bankruptcy; pay America’s creditors less than full value on the US treasuries they hold.
Clarifying his suggestion, he said that he would offer to buy the bonds back at a discount from investors in the hope of refinance them at lower rate. “I would borrow knowing that if the economy crashed, you could make a deal,” according to Trump. It may be recalled that Trump had also boasted about his acumen for restructuring four of his companies under bankruptcy laws.
When Trump Hotels and Casinos had made a 2004 bankruptcy deal, interest rate was lowered from 15 percent to 8 percent and a debt of $500 million was shaved on a dollar 1.8 billion debt. Bond-holders agreed to forgive approximately $500 million in debt in exchange for 20 percent of company’s equity, reducing Trump’s ownership stake from 47 percent to 27 percent. Publicly held US debt is around dollar 13.8 trillion at present and taxpayers would have to pay about dollar 255 billion as interest payments.
Federal government had flirted with default risks in 2011 and 2013 when the President and the House of Representatives had hit an impasse over raising the government’s borrowing limit. The country avoided a default on its debt payments, this caused some damage nevertheless. The 2011 crises led to a credit rating downgrade by S&P while the 2013 crisis produced a government shutdown. Anyhow, the creditors had never doubted about the intentions of both the parties not to default and keep the government running.
It is not clear whether Trump had laid down the above policy of debt retirement due to his naivety, ignorance or as an election tactics but the idea is simply weird and could prove disastrous for the world economy, including the US’. Likely to be nominated by the Republicans as their presidential candidate, he is speaking about a strategy which is no less than baffling. Some of the experts in the US have already predicted a disaster if Trump’s idea was implemented.
Chief Economist at Manulife, Megan Greene, said: “it seems Trump is planning to try to run the country like one of his failed business ventures, and that does not bode well.” Tony Fratto, a former Treasury Dept. official stated that “defaulting on our debt would cause creditors to rightly question the ‘full faith’ commitment we make. This isn’t a serious idea – it is an insane idea.” According to Chad Stone, Chief Economist at the Centre on Budget and Policy Priorities, “it would make a bad situation worse and increase US borrowing cost going forward because we would lose our credit rating.” President of the Conservative American Action Forum equated the idea with a “false hope”.
Though nobody has come forward to defend Trump’s statement, yet we cannot totally ignore his ideas because of the chances of his election as a President of the US. It needs reminding that the policy suggested would be reckless that would send interest rates soaring, derail economic growth and undermine the confidence in the world’s most trusted financial assets. The move would also end a policy introduced during the presidency of George Washington to pay full face value of debts incurred by the US. Government’s regular payments of its debt have all along pleased investors and supported the economy because the country can borrow at lower rates.
After Trump’s policy is put in place, investors would demand greater return for the perceived risks of non-payment in future and more tax dollars would have to be spent for repaying the debt. Trump also needs to be more cautious in his approach because countries function differently from businesses and nations service their debts through taxes, unlike corporations that could sell-off their assets and equity stakes to manage debt or wind up businesses and declare insolvency.
Trump also needs to know that the present global economic and trading order is built around US dollar and its smooth operation depends entirely on the faith in the US currency, especially with regard to its real value, universal acceptance and convertibility. In the modern day and age, the US currency is the kingpin of the world financial system and there is no replacement in sight, at least in the foreseeable future.
Other countries have accumulated hundreds of billions of US dollars in treasury bills, etc, with expectations that they will not be short-changed in any manner. All of them will be big losers because of adherence to Trump-prescribed policies; and the trust in the US promises will be lost forever. International trade would almost come to a halt if the credibility of US currency suffers a big blow. In the absence of gold standard which is no more possible to revive at present, such a blow could be ruinous for the global trade and prove highly damaging for the world economy. We can only hope that Trump realises the importance of the US presidency in today’s world and is more careful in his future public policy prescriptions.
Source: Business Recorder