About a year ago Trump committed what some economic pundits considered his greatest gaffe, suggesting that the US may not pay back all of its debt. According to Serious People at the time, the very notion was “stupid and ridiculous,” “insane,” and a threat to “incinerate the world economy.”
Trump was also entirely correct.
As we’ve seen in the past few months, there is simply no interest in making necessary cuts in government spending. The fact the Republican Party has, since 2010, won control of the House, Senate, and White House explicitly on such promises hasn’t even changed the conversation. Instead, we have seen our new Republican-controlled Washington continue the long standing tradition of the GOP of being even worse on spending than Democrats.
This was further demonstrated during the recent budget battle. Yesterday the GOP-dominated House authorized over a trillion dollars in new spending to fund the government through September. The budget failed to fulfill campaign promises such as de-funding Planned Parenthood, sanctuary cities, or significant cuts to the EPA. In the eyes of the Trump administration, however, the deal wasn’t a total loss — because they did secure increases in funding some of the president’s initiatives. In the words of Budget Director Mick Mulvaney:
We got more money for defense. We got more money for border security. We got more money for school choice. Everything that we got in this deal last night lines up with the president’s priorities.
This is how budget deals work in Washington, any desired budget cuts are traded in exchange for securing funds for pet projects politicians can campaign on later.
Meanwhile, as the debt clock continues to tick closer to $20 trillion dollars, the question isn’t whether it’s reasonable to think about an eventual US default, but rather how will our eventual default look?
As Dr. Peter Klein noted last year, Trump’s idea of renegotiating with US creditors had merit:
[T]he idea that the US can never restructure or even repudiate the national debt — that US Treasuries must always be treated as a unique and magical “risk-free” investment — is wildly speculative at best, preposterous at worst. Every other borrowing entity — individuals, business firms, and governments — has the option of renegotiating interest payments and even defaulting on loans. It is hardly an extraordinary event, even for sovereign borrowing — that’s why lenders charge a risk premium beyond the return they require to compensate for time preference.
There is lots of evidence on private, corporate, and sovereign defaults, and the results are hardly catastrophic. Depending on the circumstances, the benefits of reducing debt can exceed the costs of harming the borrower’s reputation and thus increasing the costs of future borrowing. Anyone who has been through a personal or corporate bankruptcy knows this.
Another alterative, and one the US has done repeatedly throughout its history, is simply to monetize the debt. Trump himself has suggested this was an option, noting that the US need never officially default because we “print the money.”
Perhaps that’s a reason why the Trump administration has been very good for crypto-currencies.
