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The Debt Offensive

The Debt Offensive
Profile photo of James E. Miller

Federal_Reserve_Bank_Chicago_165_West_Quincy_StreetReprinted from Taki’s Mag

God help Donald Trump’s critics. The paroxysms they have after the mogul–turned–GOP nominee’s policy pronouncements can’t be good for their health.

The latest is a real hoot. For dealing with our enormous national debt, Trump wants to do what he does best: negotiate with creditors. How so? By pressuring bondholders to accept a haircut on their payments. And if they don’t like the terms? Well, they’ll get their money by hook or by crook.

In an interview with CNBC’s Squawk Box, Trump gave a brutally honest take on our dismal fiscal prospects. “We owe so much money—nobody talks about it. Nobody talks about it until the bubble pops,” he told the stone-faced hosts. When asked if he thought the U.S. government should pay 100 cents on the dollar for its debt, Trump replied, “I would borrow knowing that if the economy crashed you could make a deal. And if the economy was good it was good so therefore you can’t lose.”

On CNN, Trump clarified his comments and declared that the U.S. government would never default on its debt “because you print the money.” He went further, stating, “If we have an opportunity where interest rates go up and you can buy debt back at a discount, I always like to be able to do that if you can do it.”

Like a curious child touching a hot pan handle, the outcry from the financial commentariat was piercing.

The New York Times described Trump’s comments as having “no modern precedent.” Patrick Chovanec of the Silvercrest Asset Management Group called it “irresponsible talk.” The Economist said it was a “completely nonsensical idea.” Kevin Drum of Mother Jones proclaimed that “Donald Trump Still Has No Idea How Government Debt Works.” One of the #NeverTrump crybabies at the RedState blog asked, “Are we sufficiently panicked, yet?”

In 2016, eight years after the financial crisis, it’s hard to take any mainstream voice seriously on economics. The very people who missed the housing bubble, and the subsequent damage done to the average man’s 401(k), are in no position to criticize Trump’s sober approach to national finance.

So what’s so radical about Trump’s proposal? Why can a corporation discount its bonds and screw over bondholders, but not the feds?

The argument goes that our financial system is based around U.S. Treasury bonds being a rock-solid form of collateral. They are supposed to be a guaranteed investment will little to no risk because Washington isn’t running out of cash anytime soon. The government maintains the power to fleece taxpayers, hence the supply of funds never runs out.

To say that U.S. treasuries may not be worth their full value in the future devalues them in the eyes of investors. It scares away potential buyers and makes current bondholders all the more jittery about their portfolio. A massive sell-off could happen, boosting interest rates and increasing borrowing costs, putting Washington even further in debt. A financial depression comes next, with fiery Armageddon not far behind.

Of course, observers are focused on the short-run ramifications of shortchanging bondholders rather than the core issue: the government’s retardedly large amount of debt.

The root problem is the ease with which the dollar is devalued. As the world’s reserve currency, King Dollar has a lot of prestige on the global stage. Demand for it is based on countries being able to use it to settle international transactions. That high standing has been milked by the government for decades, to the point where we have enough debt to make the Empire State Building look like a Christmas miniature.

The ability to manufacture dollars ex nihilo means that no lawmaker in Washington will tackle the debt in a meaningful way. The fiat money is plentiful. And any cut to government programs usually brings early retirement. The country is addicted to government spending. The unspoken plan in Congress is to keep spending, keep borrowing, and keep covering the cost by printing money until…something happens. What that is, we’re never told.

In that light, Trump’s plan is far from unreasonable. His detractors are worried about the sanctity of our national currency, but are enablers of its slow destruction. They think Trump is ushering in the next Weimar hyperinflation by threatening to print gobs of currency to pay off the debt. But that’s precisely what the Federal Reserve is already doing. Even court economist Paul Krugman admits it!

The libertarian economist Murray Rothbard once proposed a full default on bondholders as a means of forcefully cutting the debt. “Deficits and a mounting debt, therefore, are a growing and intolerable burden on the society and economy, both because they raise the tax burden and increasingly drain resources from the productive to the parasitic, counterproductive, ‘public’ sector,” he wrote. “I would advocate going on to repudiate the entire debt outright, and let the chips fall where they may.”

The very existence of the nation-state was anathema to Rothbard, but he did have a point: Economic transactions are two-way streets. Buyers of government debt understand what they are getting into when they purchase bonds. The U.S. government is more financially reckless than Enron, Bernie Madoff, and Jon Corzine combined. This isn’t breaking news. Yet financiers invest in American bonds anyway, knowing full well that the gravy train must come to a halt. They just plan on punching their ticket early enough to get off the ride before it tumbles off the rails.

When it comes to stiffing creditors, are we supposed to feel bad that a bunch of crooks made a bad investment?

Countries have a right to control their currency—not stockbrokers. Unlike other presidential candidates, Trump is less beholden to the Wall Street crooks who do dope and crash economies. The hope is that he’ll prioritize the American people over the bondholders when handling the debt. Screwing over working people to make sure Goldman Sachs can pay out its quarterly bonuses is Clintonian crap.

I wish there were another way for the Treasury to honor its obligations. But I don’t see it. We’re all gonna feel the pain when Uncle Sam’s checks bounce. Trump is right: We might as well spread the hurt around.

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James E. Miller is editor-in-chief of Mises Canada and a regular contributor to the Mitrailleuse . Send him mail

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