Hours after locking up the Republican presidential nomination this week, Donald Trump suggested that defaulting on the national debt could be a good thing. Economists and financial observers pointed out that his proposal to buy back U.S. debts for less than what America borrowed would send interest rates soaring and cripple the dollar’s vital status as the world’s safest investment.
Pressed to explain why he thinks a huge national lender like China would accept a loss on their investment in the United States on Sunday, Trump offered only a verbal shrug.
“You never know,” he told ABC’s George Stephanopoulous. “At some point, they might want to get out. Maybe they need their money, they might wanna get out.”
— This Week (@ThisWeekABC) May 8, 2016
It is extremely unlikely that any holder of U.S. bonds would take the sort of desperate need-cash-now approach to those investments that Trump imagines. But even if that did happen, the outcome wouldn’t be good for anyone involved. If Trump yanked the rug out from underneath the global financial system in this way, the resulting instability would slaughter the economy.
American debts are the safest investment in global finance. The certainty that lending money to the United States government will deliver a steady and full return in the future is what keeps the entire global economy churning. Winning a discount from one of America’s creditors would mean “the way money is measured around the world would be thrown into question,” as the Huffington Post’s Arthur Delaney put it in the wake of Trump’s initial comments last week.
The ripple effects of even a single discounted debt repurchasing move by the U.S. would put a freeze on business and investment activity throughout almost every sector of the global economy. The steadfast returns on lending to America allow money to flow smoothly through the economy, and putting full-value repayment of those debts in question would disrupt that flow. The credit freeze and jobs collapse that followed the Wall Street collapse in 2008 would seem like a tiny blip in comparison to the havoc wrought by Trump’s hypothetical debt haircut.
It can sometimes work to play these sorts of games with debt in the private business world where Trump has spent most of his life. Someone who holds a big corporate debt might be thrilled to get 75 cents on the dollar if they’re worried the company is at risk of going bankrupt and throwing their investment into the trash.
But corporate debt-repurchasing opportunities don’t work as a metaphor for America’s national borrowing portfolio, where we pay off old debts by issuing new ones each year. The countries and individuals who buy those new debts would demand a higher interest rate if they saw previous investors in U.S. debt taking a loss, causing borrowing costs to spiral — and pass along pain to the middle class through higher consumer credit costs and job losses as the private sector gets squeezed by that interest rate spiral.