x

Economy

Trump Plans May Raise Interest Rates

WASHINGTON— In the event that the U.S. economy crashed, Donald Trump has floated a recovery plan based on his own experience with corporate bankruptcy: Pay America’s creditors less than full value on the U.S. Treasurys they hold.

Experts see it as a reckless idea that would send interest rates soaring, derail economic growth and undermine confidence in the world’s most trusted financial asset.

The presumptive Republican presidential nominee suggested in a phone interview Thursday with CNBC that he would stimulate growth through borrowing. If trouble arose, he added, he could get investors to accept reduced payments for their Treasury holdings.

Trump later clarified that comment to say he would offer to buy the bonds back at a discount from investors in hopes of refinancing them at lower rates.

“I would borrow, knowing that if the economy crashed, you could make a deal,” Trump told CNBC.

Such a move, never before attempted by the U.S. government, would likely spook investors whose trust in Treasury notes keeps global financial markets operating.

The need to refinance would likely cause interest rates to spike as investors demanded a greater return for the perceived risks of non-payment. More tax dollars would have to go toward repaying the debt. Many investors would shift their money elsewhere. And the economy could endure a traumatic blow.

“It seems Trump is planning to try to run the country like one of his failed business ventures, and that does not bode well,” said Megan Greene, chief economist at Manulife.

The move would also end a policy introduced during the presidency of George Washington — and celebrated in the Pulitzer Prize-winning Broadway musical “Hamilton”— to pay full face value on the debts incurred by the country. The government’s unfailing payments of its debt have long pleased investors and supported the economy because the country can borrow at lower rates than it otherwise could.

“Defaulting on our debt would cause creditors to rightly question the ‘full faith’ commitment we make,” said Tony Fratto, a former Treasury Department official in George W. Bush’s administration. “This isn’t a serious idea — it’s an insane idea.”

Trump has touted his acumen for restructuring four of his companies under bankruptcy laws. When Trump Hotels & Casinos finished a 2004 bankruptcy reorganization, it cut $500 million off $1.8 billion in debt and reduced the interest rate to 8 percent from 15 percent.

“I don’t think it’s a failure’ it’s a success,” Trump told The Associated Press at the time.

But countries function differently from businesses. Nations usually print their own money and service their debt through taxes, unlike corporations that can sell off assets and equity stakes to manage debt or close up shop. Interest rates would spike if a government refused to pay what it owed as investors priced in the risk of default and became resistant toward lending.

“It would make a bad situation worse and increase U.S. borrowing costs on its debt going forward because we would have lost our credit rating,” said Chad Stone, chief economist at the Center on Budget and Policy Priorities.

Publicly held U.S. debt is $13.8 trillion, and taxpayers will devote likely $255 billion to interest payments this year. The market largely sets interest rates on the debt, based in part on Federal Reserve policy.

The yield on a 10-year Treasury note is about 1.8 percent, a figure that would shoot up if Trump pursued this strategy. This would cause debt payments to climb at a precarious moment for the federal budget when Social Security, Medicare and Medicaid costs will likely increase the need to borrow.

“There is no upside,” said Douglas Holtz-Eakin, an economist and president of the conservative American Action Forum. “It’s a false hope.”

The federal government flirted with default risks in 2011 and 2013 when President Barack Obama and the Republican-led House of Representatives reached an impasse over raising the government’s borrowing limit.

The government narrowly avoided defaulting on its debt payments in both instances. Still, these breakdowns did cause damage. The 2011 crisis led to a credit rating downgrade by Standard & Poor’s, while the 2013 crisis produced a government shutdown.

The statements by Trump reflect his often conflicting statements on economic policy.

Just as he floated a plan that experts say would raise interest rates, Trump separately discussed the need to be cautious about higher rates during the same CNBC interview in which he bragged about being “the king of debt.”

“It’s a real dilemma, and we have to be very, very careful,” he said. “I love debt. I love playing with it, but of course now you’re talking about something very, very fragile.”

JOSH BOAK, AP Economics Writer

RELATED

Top Stories

Columnists

A pregnant woman was driving in the HOV lane near Dallas.

General News

FALMOUTH, MA – The police in Falmouth have identified the victim in an accident involving a car plunging into the ocean on February 20, NBC10 Boston reported.

General News

NEW YORK – Meropi Kyriacou, the new Principal of The Cathedral School in Manhattan, was honored as The National Herald’s Educator of the Year.

Video

Mitsotakis: Today’s Bill Comes to Define a New Field in Which Everyone Should Move

ATHENS - At the end of August 2022, I announced a legislative initative for the upgrading and modernisation of the protection, the operation of the security agencies and the operation of the communications and after the change in National Intelligence Service's (EYP) leadership and the establishment of double check to the legal intrusions," stated Prime Minister Kyriakos Mitsotakis addressing the parliament on Thursday during the debate on Justice Minstry's bill on the lifting of the communications confidentiality, cybersecurity and protection of the citizens' personal data.

The Greek Americans travelled to Roosevelt Island Thursday December 8th to face Zum Schneider in game 9 of the EPSL.

Asteras Tripolis New York literally fought to the very end, but fell short at Randall’s Island against Cosmopolitan’s League NY International with a 3-2 loss for the Flamhaft Cup round of 16.

Croatia knocked Brazil out of the World Cup on Friday, beating the five-time champions 4-2 in a penalty shootout to reach the semifinals for the second straight time.

ATHENS - Greek annual inflation rate slowed to 8.

Enter your email address to subscribe

Provide your email address to subscribe. For e.g. abc@xyz.com

You may unsubscribe at any time using the link in our newsletter.