In the event that the U.S. economy crashed, Donald Trump has floated a recovery plan based on his own experience with corporate bankruptcy: Pay America's creditors less than full value on the U.S. Treasurys they hold.
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."
Sunday, May 8, 2016
Trump's Crazy Debt Plan