Donald Trump’s idea to refinance U.S. government debt sent folks into a tizzy last week. Swift, near-unanimous condemnation came from all corners.
It’s illegal and won’t work, they said. “Only a boob would propose such a thing!”
I, for one, have learned not to underestimate Mr. Trump. I don’t plan to vote for him — but I don’t think he is a boob.
Economists, news stories and the Hillary Clinton campaign all said Trump would “default” on the national debt by not repaying Treasury bonds in full.
He said no such thing.
Trump said he would offer to repurchase older bonds at a discount and then replace them with new bonds. Such deals are common in corporate bankruptcies.
People missed that word “offer.”
Offering someone a deal is not the same as forcing them into a deal. It’s not a default when lenders accept a voluntary refinancing.
The critics are correct, though, that the financial benefits of such a deal would be minimal. It wouldn’t help the Treasury and bondholders would have little incentive to cooperate.
What they forget is that Trump doesn’t play by their rules.
Let’s talk about that word “incentive” as Trump might see it.
The president of the United States has considerably more power than the head of a troubled corporation. Even against a hostile Congress, he (or she) can do a lot without anyone’s permission.
So, suppose President Trump’s refinancing offer came with some non-monetary incentives.
Would big bondholders like a deal that included, say, fewer IRS audits? Regulatory relief? Protection by the U.S. Navy?
The carrots could also be sticks.
For example, what if Saudi Arabia didn’t want to play ball? Commander-in-Chief Trump could redeploy the USAF tankers that support the Saudi war on Yemen. The head-chopping princes would then have to refuel their own fighter jets — which they can’t do unless they buy Boeing tanker planes.
It would be a classic Trump deal — the U.S. wins either way. And Trump could go even further.
The president’s constitutional pardon power is absolute. Neither Congress nor the Supreme Court can stop him from pardoning anyone he wishes, for any federal crime, for any reason.
Might a few strategic pardons entice some big-money people to deal? I suspect so — especially if the rich folks didn’t even know they had committed any crimes. The U.S. code has so many vague offenses that practically all of us are criminals of some kind.
Such moves would redefine what it means to “play hardball.” They might have unintended negative consequences, too. Lenders could stop buying Treasury bonds or demand higher interest rates.
I think that risk is minimal. Just look at recent history.
Despite two government shutdowns, default threats and a downgraded credit rating, investors still throw cash at our Treasury even with yields barely above zero.
Could something change that? Maybe, but no one knows what it is.
In dismissing Trump’s idea, some writers haughtily say, “Government is different; you can’t run it like a business.”
They’re correct.
One big difference: private businesses can’t arrest, harass or bomb their own lenders. The U.S. government can.
To be clear, I’m not advocating any of this. I’m just saying a Trump-led White House might try it.
Given what Trump has accomplished already, it just might work.
Patrick Watson is an Austin-based financial writer. Follow him on Twitter
@PatrickW
To read more of his insights,
CLICK HERE NOW.