Trump Could Cause An Unprecedented Global Financial Crisis

Donald Trump Just Threatened To Cause An Unprecedented Global Financial Crisis

There's a big difference between government debt and private debt.

Matthew Yglesias
CNBC
Friday, 6 May 2016

In an interview Thursday on CNBC, Donald Trump broke with tired clichés about the evils of federal debt accumulation. "I am the king of debt," he said. "I love debt. I love playing with it."

But he replaced fearmongering about debt with an even more alarming notion — a bankruptcy of the United States federal government that would incinerate the world economy.

"I would borrow, knowing that if the economy crashed, you could make a deal," Trump said. "And if the economy was good, it was good. So therefore, you can't lose."

With his statement, Trump not only revealed a dangerous ignorance about the operation of the national monetary system and the global economic order, but also offered a brilliant case-study in the profound risks of attempting to apply the logic of a private business enterprise to the task of running the United States of America.

Trump is a businessman, and in terms of thinking like a businessman his idea makes sense.

The interest rate that investors currently charge the United States in order to borrow money is very low. A smart business strategy under those circumstances would be to borrow a bunch of money and undertake a bunch of big investment projects that are somewhat risky but judged to possibly have a huge payoff.

You now have two possible scenarios.

In one scenario, the investments work out and you make a ton of money. In that case, you can easily pay back the loan and everyone wins.

In another scenario, the investments don't work out and you don't make much money. In that case, you objectively can't pay back the loan. You either work out a deal with the people you owe money to in which they accept less than 100 percent of what you owe them (this is called a "haircut") or else you go to bankruptcy court and a judge will force them to accept less than 100 percent.

This is how businesspeople think — especially those who work in capital-intensive industries like real estate. And for good reason. This is the right way to run a real estate company.

Applying this idea to the United States would destroy the economy.  The United States of America, however, is not a real estate development company. If a real estate company defaults on its debts and its creditors lose money, that's their problem. If a bank fails as a result, then it's the FDIC's responsibility to clean it up.

The government doesn't work like that. Right now, people and companies all around the world treat US government bonds as the least risky financial asset in the universe. If the government defaults and banks fail as a result, the government needs to clean up the mess. And if risk-free federal bonds turn out to be risky, then every other financial asset becomes riskier. The interest rate charged on state and local government debt, on corporate debt, and on home loans will spike. Savings will evaporate, and liquidity will vanish as everyone tries to hold on to their cash until they can figure out what's going on.

Every assessment of risk in the financial system is based on the idea that the least risky thing is lending money to the federal government. If that turns out to be much riskier than previously thought, then everything else becomes much riskier too. Business investment will collapse, state and local finances will be crushed, and shockwaves will emanate to a whole range of foreign countries that borrow dollars.

Remember 2008, when the markets went from thinking housing debt was low-risk to thinking it was high-risk, and a global financial crisis was the result? This would be like that, but much worse — US government debt is the very foundation of low-risk investments.

What's especially troubling about Trump's proposal is that there is genuinely no conceivable circumstance under which this kind of default would be necessary. The debt of the federal government consists entirely of obligations to pay US dollars to various individuals and institutions. US dollars are, conveniently, something the US government can create instantly and in infinite quantities at any time.

Of course, it might be undesirable to finance debts by printing money rather than raising taxes or cutting spending. In particular, that kind of money printing could lead to inflation, and even though inflation is very low right now there's no guarantee that it will always be low.

But a little bit of inflation is always going to be strictly preferable to destroying the whole American economy, especially because a debt default would cause a crash in the value of the dollar and spark inflation anyway.

Trump doesn't know what he's talking about.  This is the second time this week that Trump has revealed a profound ignorance of an issue related to government debts.

The early instance in which he kept proposing that Puerto Rico declare bankruptcy even though doing so is illegal was on a question that's very important to Puerto Ricans but not so important to everyone else. It is, however, important to pay attention to how presidential candidates approach issues across the board — and what we saw with Puerto Rico is that Trump approached the issue by simplistically applying business logic without bothering to check whether it applies to the actual situation.

Now in the CNBC interview he's done the exact same thing on a matter of more consequence — not the debt of Puerto Rico but the debt of the United States of America. It's understandable that a real estate developer might assume that what works in real estate would work in economic policy, but it's not true. And Trump hasn't bothered to check or ask anyone about it.

How Would Trump Fare As America's CEO?

HOW WOULD TRUMP FARE AS AMERICA’S CEO?

By Fareed Zakaria

Thursday, May 5, 2016

At the heart of Donald Trump’s appeal is his fame as a successful businessman. It’s why most of his supporters don’t worry about his political views or his crude rhetoric and behavior. He’s a great chief executive and will get things done. No one believes this more than Trump himself, who argues that his prowess in the commercial world amply prepares him for the presidency. “In fact I think in many ways building a great business is actually harder,” he told GQ last year.

There is some debate about Trump’s record as a businessman. He inherited a considerable fortune from his father and, by some accounts, would be wealthier today if he had simply invested in a stock index fund. His greatest skill has been to play a successful businessman on his television show “The Apprentice.”

Regardless, it is fair to say that Trump has formidable skills in marketing. He has been able to create a brand around his name like few others. The real problem is that these talents might prove largely irrelevant because commerce is quite different from government. The modern presidents who achieved the most — Franklin Roosevelt, Lyndon Johnson and Ronald Reagan — had virtually no commercial background. Some who did, George W. Bush and Herbert Hoover, fared worse in the White House. There is no clear pattern. One of the few successful CEOs who did well in Washington is Robert Rubin. A former head of Goldman Sachs, he served as the chief White House aide on economics and then treasury secretary in Bill Clinton’s administration. 

When he left Washington, he reflected in his memoirs that he had developed “a deep respect for the differences between the public and private sectors.”

“In business, the single, overriding purpose is to make a profit,” he wrote. “Government, on the other hand, deals with a vast number of legitimate and often potentially competing objectives — for example, energy production versus environmental protection, or safety regulations versus productivity. This complexity of goals brings a corresponding complexity of process.”

He then noted that a big difference between the two realms is that no political leader, not even the president, has the kind of authority every corporate chief does. CEOs can hire and fire based on performance, pay bonuses to incentivize their subordinates, and promote capable people aggressively. By contrast, Rubin pointed out that he had the authority to hire and fire fewer than 100 of the 160,000 people who worked under him at the Treasury Department. Even the president has limited authority and mostly has to persuade rather than command.

This is a feature, not a flaw, of American democracy. Power is checked, balanced and counterbalanced to ensure that no one branch is too powerful and that individual liberty can flourish. It is no accident that Trump admires Vladimir Putin, who doesn’t have to deal with the complications of modern democratic government and can simply get things done.

In interviews with the New York Times, Trump imagined his first 100 days in office: He would summon congressional leaders to lobster dinners at Mar-a-Lago, threaten CEOs in negotiations at the White House (“The Oval Office would be an amazing place [from which] to negotiate”) and make great deals. When talking about the positions he would fill, Trump explained, “I want people in those jobs who care about winning. The U.N. isn’t doing anything to end the big conflicts in the world, so you need an ambassador who would win by really shaking up the U.N.”

This displays an astonishing lack of understanding about the world. The United Nations can’t end conflicts because it has no power. That rests with sovereign governments (unless Trump wants to cede U.S. authority to U.N. Secretary General Ban Ki-moon). The notion that all it would take is a strong U.S. ambassador to shake up the U.N., end conflicts and “win” is utterly removed from reality. Yet it is a perfect example of business thinking applied in a completely alien context.

Success in business is important, honorable and deeply admirable. But it requires a particular set of skills that are often very different from those that produce success in government. As Walter Lippmann wrote in 1930 about Herbert Hoover, possibly the most admired business leader of his age, “It is true, of course, that a politician who is ignorant of business, law, and engineering will move in a closed circle of jobs and unrealities. . . . [But the] popular notion that administering a government is like administering a private corporation, that it is just business, or housekeeping, or engineering, is a misunderstanding. The political art deals with matters peculiar to politics, with a complex of material circumstances, of historic deposit, of human passion, for which the problems of business or engineering as such do not provide an analogy.”

(c) 2016, Washington Post Writers Group

A Terrible Choice: Hillary or Trump?

A terrible choice: Hillary or Trump?

By Jay Ambrose
Tribune News Service
Charlotte Observer
2016 May 6

Donald Trump is a shallow, uninformed, narcissistic, immature man who could be catastrophic as president.

But Hillary is an awful choice, too.

We’re looking at a presidential race that doesn’t seem as if it can possibly turn out right.

The GOP presidential primary campaign in Indiana was winding down. Donald Trump was way ahead in the polls and had nothing much to worry about. But that did not stop him from hinting something more outrageous than we have ever heard from any presidential candidate besides himself – that Ted Cruz’s father may have had something to do with John F. Kennedy’s assassination.

This is horrible. It is maniacal. It is stupid. It hints at dementia, or, worse than that, at a moral grounding as flimsy as feathers. If this had been Trump’s only excursion of that kind, one might hope it meant nothing substantial.

But it does, and it is not enough to say that he is a marketing genius who tricks media into paying excess attention to him. Or to say that he just says what he thinks, political correctness be hanged. Or to say he is taking on an abusive establishment. Or to say he is teaching elites a lesson. What needs to be said is that he is a shallow, uninformed, narcissistic, immature man without a hint of reliable judgment and someone who could be catastrophic as president.

The horror is that his victory in Indiana and Cruz’s dropping out of the race set him up to be the Republican nominee and that his general election opponent is also frightening in different ways. If he should, then, make it to the White House, what would we get?

People say he is unpredictable, which is to say, it is predictable he will remain a scatterbrain. He is capable of just about anything.

It is hard to imagine him ever settling down into a state of enduring reasonableness.

How did we get here? Part of it was media run amuck, but that is at least to some degree understandable. If you had someone in a marathon race who was running on his hands, wouldn’t cameras focus on him? More culpability resides with the media for incessant attention on the horse race and too little on the issues.

The bigger matter is all that is going wrong in our society. Here is an incomplete list: distrust of everyone and everything; elitist disdain for the common people; economic policies creating working class misery; craziness in our universities; judges shoving aside law to reconfigure society to their liking; divisiveness and stalemate between Democrats and Republicans; supercilious leftism that doesn’t know what it’s talking about; a diminishment of civic associations and self-reliance; the dissolution of family and the social disintegration that ensues.

Now we’re looking at a presidential race that doesn’t seem as if it can possibly turn out right. Hillary Clinton and her husband have played let’s-get-rich games at the expense of integrity, and on issue after issue she is off track. A real dread is what she would do with Supreme Court nominees.

Is the least of all evils not to vote?