On Thursday, Donald Trump said that as president, he might seek to reduce the national debt by convincing creditors to accept less than a full payment. "I would borrow, knowing that if the economy crashed, you could make a deal," Trump said, in comments that the The New York Times claimed "have no modern precedent" coming from the mouth of a major presidential candidate. "If the economy was good, it was good. So, therefore, you can't lose," Trump continued.
Experts have dismissed the idea that creditors would accept anything less than 100 cents on the dollar, no matter how good a businessman Trump might be. In fact, it might be because he's a businessman that Trump thinks the scheme could actually work:
Repurchasing debt is a fairly common tactic in the corporate world, but it only works if the debt is trading at a discount. If creditors think they are going to get 80 cents for every dollar they are owed, they may be overjoyed to get 90 cents. Mr. Trump's companies had sometimes been able to retire debt at a discount because creditors feared they might default.But Mr. Trump's statement might show the limits of translating his business acumen into the world of government finance. The United States simply cannot pursue a similar strategy. The government runs an annual deficit, so it must borrow to retire existing debt. Any measures that would reduce the value of the existing debt, making it cheaper to repurchase, would increase the cost of issuing new debt. Such a threat also could undermine the stability of global financial markets. [The New York Times]
What's more, history shows that spooking investors away from taking a chance on relatively safe Treasury securities ends up costing taxpayers an arm and a leg. Read more about Trump's unprecedented plan — and what economists have said against it — in The New York Times.
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