by Mitch Kokai
Senior Political Analyst, John Locke Foundation
With our national debt now topping $19.15 trillion and likely to reach $29 trillion by 2026, this is not good news.
But don’t worry — Donald Trump has a solution for this growing tide of debt. He just won’t pay it.
Last week Trump initially said, “I would borrow, knowing that if the economy crashed, you could make a deal” to pay bondholders less than full value on the debt owed to them. This is, after all, the sort of thing Trump has done with creditors when, say, one of his casinos went bankrupt. It is also more or less what Greece has repeatedly negotiated with its bondholders over the last few years.
But the United States is neither Greece nor one of The Donald’s businesses. There wouldn’t be any outside entity to force bondholders to accept less than face value. And a President Trump would have little leverage in any negotiation without threatening a general default. But even the hint of a default would inject an almost unprecedented level of uncertainty into international markets, causing interest rates to spike for all other kinds of debt, from corporate debt to state- and local-government debt.
In this maelstrom of uncertainty, liquidity would probably collapse, since financial institutions, in an attempt to reduce their exposure, would be unwilling to make loans. This, in turn, would lead to a huge drop in business investment and consumer spending. It would be like the last economic crisis on steroids.